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rated:
Due to financial hardship, I was unable to contribute to my 401k in 2016. I expect to start up again in 2017.

My biggest regret on this is losing the Company match. I'm still not in a financial position to resume to 401k contributions now, to get the match in 2017. However, I had the idea that I could make an early withdrawal from an IRA I hold for the amount of the match, and use those funds to offset the income loss that will result when I massively increase my 401k deduction now. 

It's certainly not ideal, but my thought is, it is making the best of a bad situation. The tax I will be subject to for the IRA withdrawal will be offset by the tax savings from the 401k contribution. So the net cost to me will be the 10% penalty. In exchange for the 10% I will get a 100% match from my Company for that amount.

Is this sound thinking? Am I missing anything?

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That's correct. Just be careful with the 1 per year rule. (I believe) you used to be able to make 1 per year to/from any... (more)

BingBlangBlaow (Nov. 04, 2016 @ 8:52p) |

Money is fungible. What you describe is equivalent to basically using 3.5k of after tax money for whatever purpose or to... (more)

fwuser12 (Nov. 04, 2016 @ 10:12p) |

Just verifying how all the withdrawals and deposits are treated tax-wise.  Don't mind me; I'm a little slow.

cleanbeat (Nov. 04, 2016 @ 10:32p) |

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rated:
Are you saying that you would make massive 401k contributions for the remaining paychecks in 2016 in order to capture the match?

First, confirm that your plan will allow you to do that.  Some plans will only match a percentage of each check; other plans will allow you to exceed that percentage and "true up" the matching at the end of the year so that you will in fact get the higher amount of the match.  That would be important to confirm before you do anything else.

How much are we talking about?  Personally, I'd be on rice and beans for the rest of the year in order to be able to afford to get the matching.  I wouldn't rob the IRA to cover the pinch to my cash flow.
 

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Many employers only do per-paycheck matching up to the % of income they match.

IE: If you make $120K per year ($5K per paycheck) and your employer matches 100% of your contributions up to 3% of your wages, they would match up to $150 per pay period ($5,000 x 0.03).

Some employers match without per pay period limitations. You should understand what type of program your employer offers before you make any decision.

Regarding the IRA distribution, could you use a credit card (say a 0% APR on purchases for first year promo) to help you get the cash-flow this year without taking an early distribution?

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Yes, that's exactly the plan. I can change contribute to 75% for the rest of the year and the match maxs at $3500 so I can get there for $350 penalty I think.

This is the last resort in that I hope I can find other ways to go about it but I'm first trying to see if I have a viable option on my hands.

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Long story short I had a buyer under contract to purchase my second home following a one-year lease to buy and it fell through. So now I have no rental income and no buyer so there's a lot of uncertainty so again just gauging my options.

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$3,500 net of taxes is going to pinch your cash flow for the next two months by less than $1,500 a month.  If you really can't get by without making up that gap from somewhere else, just write yourself a couple of 0% balance transfer checks as needed and pay it back over the next couple of months.  I wouldn't touch the IRA.

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What is your credit and comfort level like for a line of credit against the property?.  The 0% credit card idea can buy you 18 to 21 months a lot cheaper than the taxes on that IRA penalty plus taxes on that extra IRA income from a tax standpoint.

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Another option to conside is to take out a loan from your 401k instead of raiding your IRA. There may be a fee involved but may be cheaper than paying taxes and the penalty on an early withdrawal from an IRA.

You can pay off your 401k loan when your cash flow improves, but you'll be receiving a smaller paycheck until you pay off the loan if you can survive on the reduced net pay.

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JW10 said:   What is your credit and comfort level like for a line of credit against the property?.  The 0% credit card idea can buy you 18 to 21 months a lot cheaper than the taxes on that IRA penalty plus taxes on that extra IRA income from a tax standpoint.

This goes to the heart of my question. The taxes on the Ira income (not the penalty tho) will be 100% offset by the like amount contribution to the 401k, I think. But am I correct about that?

To the others, thanks for the suggestions and they are definitely on the table. I feel until the house sells ( there's no telling how long that might take), I need to preserve any available credit to get by on that house's expenses. So preserving the 401K match is actually my last priority here but it just seems like a no-brainer to not spend 350 to get 3500 if I'm not missing something

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chipper1234 said:   This goes to the heart of my question. The taxes on the Ira income (not the penalty tho) will be 100% offset by the like amount contribution to the 401k, I think. But am I correct about that?
 

Yes, but you can realize the tax benefit of the 401k contribution without cashing out the like amount from the IRA.  You don't need one to get the other.  Find the money elsewhere, and you avoid the tax bite on the IRA distribution and you get the benefit of the 401k contribution.  Win-win.

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Getting a loan from somewhere else other than your IRA to fund the match is almost certainly a better option.  A 401k loan may, in some plans, prevent you from making additional 401k contributions while it's outstanding. 

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Take a loan against a hard asset at a fair rate or get a 0% card and put all your expenses on it then pay off the min for as long as you can.  

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I repeat ... What is the current loan status on the house you are trying to sell? Is there room for a line of credit? Some line of credit do not require a monthly payment. What is the market this property is in?

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It's messy. A relationship I had came to a sudden end and I relocated from NY to FL perhaps more quickly than I should have. I took a HEL on the NY home as DP for FL home. I had a contract to sell the New York home after one year so I thought I'd be safe to just stop contributing to the 401K for just this one year. Now uncertainty abounds because I lost the tenant and the funds the significant other was contributing. So to answer your question I can't borrow further against the NY home but maybe the FL. It just involves taking on even more debt and it's starting to freak me out a bit. One of the advantages of this idea I had is that it cost me 350 but then I'm done I don't have to pay it back monthly
. Having said that I think the people have spoken and I need to try to find any way possible to not withdraw against the Ira.

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chipper1234 said:   It's messy. A relationship I had came to a sudden end and I relocated from NY to FL perhaps more quickly than I should have. I took a HEL on the NY home as DP for FL home. I had a contract to sell the New York home after one year so I thought I'd be safe to just stop contributing to the 401K for just this one year. Now uncertainty abounds because I lost the tenant and the funds the significant other was contributing. So to answer your question I can't borrow further against the NY home but maybe the FL. It just involves taking on even more debt and it's starting to freak me out a bit. One of the advantages of this idea I had is that it cost me 350 but then I'm done I don't have to pay it back monthly
. Having said that I think the people have spoken and I need to try to find any way possible to not withdraw against the Ira.

Like dcwilbur said, it's less than $1,500/month for a relatively short period of time.  The reason you should avoid taking an early IRA distribution in this specific instance is because there are other options available to you that are better.  Perhaps the biggest point in my previous sentence is one that's hidden - we can see those better options more easily because we're looking at the situation from far away.  Try not to freak out and remain as calm and pragmatic as you can.  I would never, ever, ever, ever, ever trade $350K for less stress.  Endure the stress and walk away with your money when it's all done.  I know it's terrifying taking on more debt, but your entire problem could be solved tomorrow if you found a buyer for the NY house.

Your problem is not really additional debt; it's lack of liquidity.  You have money tied up in the FL home and you have equity in the NY home that you'd seemingly prefer to liquidate if you can.  Depending on where it is in NY, I have a friend who does RE (not his primary job, but he's a hard worker and has a flexible schedule) who I trust and can recommend, if you wanted to find a new agent and list it immediately.  Just over a year ago he was my selling agent on a condo that took less than 4 months to sell from initial listing on MLS to closing date, and it wasn't an easy, ideal sale.  If you might be interested, send me a PM and I'll give you his information.

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If you are going to take it out of an IRA (as a last resort), keep in mind that you can use the 60-day rule to put the money back in the IRA and avoid tax and penalty. This will help if the cash situation is short-term. The 60-day is quite strict and you need to be careful if you do this. Moreover, there is a limit of one rollover in any 12-month period.

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fwuser12 said:   If you are going to take it out of an IRA (as a last resort), keep in mind that you can use the 60-day rule to put the money back in the IRA and avoid tax and penalty. This will help if the cash situation is short-term. The 60-day is quite strict and you need to be careful if you do this. Moreover, there is a limit of one rollover in any 12-month period.

This might be the answer. I wasn't aware of this. Anything can happen in 60 days... Sell the home, tax refund, who knows but it buys me time.

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fwuser12 said:   If you are going to take it out of an IRA (as a last resort), keep in mind that you can use the 60-day rule to put the money back in the IRA and avoid tax and penalty. This will help if the cash situation is short-term. The 60-day is quite strict and you need to be careful if you do this. Moreover, there is a limit of one rollover in any 12-month period.
  Is there any real advantage to doing a 60-day rollover as opposed to taking out a traditional 401K loan and just paying it back quickly?

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chipper1234 said:   
fwuser12 said:   If you are going to take it out of an IRA (as a last resort), keep in mind that you can use the 60-day rule to put the money back in the IRA and avoid tax and penalty. This will help if the cash situation is short-term. The 60-day is quite strict and you need to be careful if you do this. Moreover, there is a limit of one rollover in any 12-month period.

This might be the answer. I wasn't aware of this. Anything can happen in 60 days... Sell the home, tax refund, who knows but it buys me time.

Just remember that the withdrawal could be subject to withholding so you may have to withdraw a larger amount so that your net amount covers what you need it to. 

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dcwilbur said:   Just remember that the withdrawal could be subject to withholding so you may have to withdraw a larger amount so that your net amount covers what you need it to. 
  +1. You will also have to put back (within 60 days) the full amount withdrawn (amount of your net check plus the withholding amount) to fully avoid tax/penalty.

Note that you are doing what the IRS refers to as a "60-day rollover": https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-distributions
Read the rules carefully.

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DTASFAB said:   
fwuser12 said:   If you are going to take it out of an IRA (as a last resort), keep in mind that you can use the 60-day rule to put the money back in the IRA and avoid tax and penalty. This will help if the cash situation is short-term. The 60-day is quite strict and you need to be careful if you do this. Moreover, there is a limit of one rollover in any 12-month period.
  Is there any real advantage to doing a 60-day rollover as opposed to taking out a traditional 401K loan and just paying it back quickly?

  Just so you know, unrelated to all this I have a small outstanding loan on the 401k and the plan only allows 1 at a time. So this is not an option.

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I've withdrawn cash from my Schwab Traditional IRA several times. Withholding is at my option; not a requirement. I request a transfer to my bank account and it shows up in a couple of days. Who is your IRA custodian? Maybe someone here has experience with them.

I think the 60-day roll-over is a good first step. Re-contribute as much as you can from pre-tax earnings within 45 days, then get an un-secured short-term loan to cover the rest and pay back the loan as soon as possible. Try joining a credit union or go to prosper.com if you have good credit. The smaller the loan, the less after-tax dollars you have to spend offsetting your 100% match.

Good luck!

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Another possibility:
pay off the 401k loan with money from IRA. Take out another 401k loan in a month and a half or so and roll over the IRA distribution.

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I'd just borrow the money at the best rate I could get. You're making 100% on the match money. I'm assuming you'll pay it back in less than a year..

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cleanbeat said:   I've withdrawn cash from my Schwab Traditional IRA several times. Withholding is at my option; not a requirement. I request a transfer to my bank account and it shows up in a couple of days. Who is your IRA custodian? Maybe someone here has experience with them.

I think the 60-day roll-over is a good first step. Re-contribute as much as you can from pre-tax earnings within 45 days, then get an un-secured short-term loan to cover the rest and pay back the loan as soon as possible. Try joining a credit union or go to prosper.com if you have good credit. The smaller the loan, the less after-tax dollars you have to spend offsetting your 100% match.

Good luck!

  One minor glitch: since you have an employer-sponsored retirement plan, and particularly if your spouse also has an employer-sponsored retirement plan, your ability to deduct IRA contributions (including roll-over replacements I presume) may be limited depending on your income.  Probably not a deal-breaker, but you may have to use after-tax dollars to replace the IRA roll-over funds.  You will need to run the numbers.

See http://www.schwab.com/public/schwab/investing/retirement_and_planning/understanding_iras/traditional_ira/contribution_limits 

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A Rollover is not a contribution.
It's just distributing the money on one day, and depositing it within 60 days. If you don't redeposit  within 60 days, it's not a rollover, but we have recent guidance on completing a rollover after the 60 day limit under some circumstances.

https://www.irs.gov/retirement-plans/retirement-plans-faqs-relat...

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taxmantoo said:   A Rollover is not a contribution.
It's just distributing the money on one day, and depositing it within 60 days. If you don't redeposit  within 60 days, it's not a rollover, but we have recent guidance on completing a rollover after the 60 day limit under some circumstances.

https://www.irs.gov/retirement-plans/retirement-plans-faqs-relating-to-waivers-of-the-60-day-rollover-requirement

  So how would that work?

1. Withdraw $3,500 from traditional IRA;
2. Use the money for whatever purpose, such as tax-deductible 401k contribution;
3. Replace the withdrawn funds with after-tax dollars within 60 days;
4. The withdrawn funds are not taxed or penalized; and
5. Re-deposited funds are not deductible and they do not count toward any IRA contribution limits irrespective of availability of employee-sponsored retirement plans?

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chipper1234 said:   
DTASFAB said:   
fwuser12 said:   If you are going to take it out of an IRA (as a last resort), keep in mind that you can use the 60-day rule to put the money back in the IRA and avoid tax and penalty. This will help if the cash situation is short-term. The 60-day is quite strict and you need to be careful if you do this. Moreover, there is a limit of one rollover in any 12-month period.
  Is there any real advantage to doing a 60-day rollover as opposed to taking out a traditional 401K loan and just paying it back quickly?

  Just so you know, unrelated to all this I have a small outstanding loan on the 401k and the plan only allows 1 at a time. So this is not an option.

  
xerty already mentioned a good point, that I feel is worth repeating now that we know you already have a 401k loan outstanding. Do you know if you can even make a contribution with that loan outstanding?
xerty said:   A 401k loan may, in some plans, prevent you from making additional 401k contributions while it's outstanding. 
  
I'm also in the camp that says to not take a withdrawal and pay the penalty, but get the money from somewhere else. Even a higher interest rate credit card would end up being less than $350 if you were able to pay it off fairly soon. You mentioned that you're only paying the 10% penalty since the tax on the withdrawal equals the tax on the contribution, but you're still paying tax now on the withdrawal. dcwilbur mentioned how that means you actually have to withdraw more. If you're paying 25% tax, you'd have to withdraw $4,667, and now you're also talking about a $467 penalty.

Also, if you go with something like a 0% (or low %/fee) balance transfer now with a 12-18 month period, you can pay it back cheaply and if you ever decide you want or need to get rid of it, you can always take the IRA distribution then.

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cleanbeat said:   
taxmantoo said:   A Rollover is not a contribution.
It's just distributing the money on one day, and depositing it within 60 days. If you don't redeposit  within 60 days, it's not a rollover, but we have recent guidance on completing a rollover after the 60 day limit under some circumstances.

https://www.irs.gov/retirement-plans/retirement-plans-faqs-relating-to-waivers-of-the-60-day-rollover-requirement

  So how would that work?

1. Withdraw $3,500 from traditional IRA;
2. Use the money for whatever purpose, such as tax-deductible 401k contribution;
3. Replace the withdrawn funds with after-tax dollars within 60 days;
4. The withdrawn funds are not taxed or penalized; and
5. Re-deposited funds are not deductible and they do not count toward any IRA contribution limits irrespective of availability of employee-sponsored retirement plans?

  That's correct. Just be careful with the 1 per year rule. (I believe) you used to be able to make 1 per year to/from any unique accounts, so you could keep your IRA split among multiple accounts and essentially keep a portion of it semi-liquid while floating the rollovers between accounts. Now it is only one to/from any accounts (I also believe that change was to stop the free float).

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cleanbeat said:   
taxmantoo said:   A Rollover is not a contribution.
It's just distributing the money on one day, and depositing it within 60 days. If you don't redeposit  within 60 days, it's not a rollover, but we have recent guidance on completing a rollover after the 60 day limit under some circumstances.

https://www.irs.gov/retirement-plans/retirement-plans-faqs-relating-to-waivers-of-the-60-day-rollover-requirement

  So how would that work?

1. Withdraw $3,500 from traditional IRA;
2. Use the money for whatever purpose, such as tax-deductible 401k contribution;
3. Replace the withdrawn funds with after-tax dollars within 60 days;
4. The withdrawn funds are not taxed or penalized; and
5. Re-deposited funds are not deductible and they do not count toward any IRA contribution limits irrespective of availability of employee-sponsored retirement plans?

Money is fungible. What you describe is equivalent to basically using 3.5k of after tax money for whatever purpose or to put towards a tax-deductible 401k and get a tax deduction. The 3.5k coming out of IRA and going back in has no net effect.

  What are you trying to accomplish?

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fwuser12 said:   
cleanbeat said:   
taxmantoo said:   A Rollover is not a contribution.
It's just distributing the money on one day, and depositing it within 60 days. If you don't redeposit  within 60 days, it's not a rollover, but we have recent guidance on completing a rollover after the 60 day limit under some circumstances.

https://www.irs.gov/retirement-plans/retirement-plans-faqs-relating-to-waivers-of-the-60-day-rollover-requirement

  So how would that work?

1. Withdraw $3,500 from traditional IRA;
2. Use the money for whatever purpose, such as tax-deductible 401k contribution;
3. Replace the withdrawn funds with after-tax dollars within 60 days;
4. The withdrawn funds are not taxed or penalized; and
5. Re-deposited funds are not deductible and they do not count toward any IRA contribution limits irrespective of availability of employee-sponsored retirement plans?

Money is fungible. What you describe is equivalent to basically using 3.5k of after tax money for whatever purpose or to put towards a tax-deductible 401k and get a tax deduction. The 3.5k coming out of IRA and going back in has no net effect.

  What are you trying to accomplish?

  Just verifying how all the withdrawals and deposits are treated tax-wise.  Don't mind me; I'm a little slow.

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