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Don't Do It! (Cashing Out 401ks)
The Market Ticker ^ | 11-08-2009 | Karl Denninger

Posted on 11/09/2009 7:34:12 AM PST by blam

Don't Do It! (Cashing Out 401ks)

Monday, November 9. 2009
Posted by Karl Denninger in Consumer at 08:44

Grrrrr....

As the last of his severance pay dwindled away in March, Brad Cleghorn of northwest suburban Marengo cashed out his 401(k) plan in order to pay his mortgage and feed his family.

Cleghorn is not alone. A Hewitt Associates study shows that 46 percent of workers with 401(k) plans who lost or switched jobs cashed the plans in, a trend that could lead to serious problems when younger generations of people working today reach retirement.

That's not the real problem folks.

Let me make this crystal clear:

Your 401k or IRA has near-absolute protection in a personal bankruptcy. As a qualified retirement plan it cannot be seized by creditors if you file a Chapter 7 or Chapter 13.

The absolutely worst thing you can do is to cash out those plans. This is not just about sabotaging retirement, although that's serious.

This is the "human face" on the games our government has played with bailing out banks and other big financial institutions. You, "Joe Six Pack", hasn't been helped at all, and bill collectors and others will even "suggest" that you cash in retirement funds so you can pay them!

Don't do it!

Go see a qualified CPA and/or Bankruptcy Attorney. Yes, they'll charge you $100 or so to spend a half-hour going over your circumstances and personal situation.

[snip]

(Excerpt) Read more at market-ticker.denninger.net ...


TOPICS: News/Current Events
KEYWORDS: 401k; bankrupcy; bhoeconomy; consumer; economy; money; personalfinance; unemployment
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1 posted on 11/09/2009 7:34:13 AM PST by blam
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To: blam

As a qualified retirement plan it cannot be seized by creditors if you file a Chapter 7 or Chapter 13.


I don’t think your house can be seized either so it is not a good arguement...............


2 posted on 11/09/2009 7:38:07 AM PST by PeterPrinciple ( Seeking the truth here folks.)
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To: blam

The lack of money and financial management among the US population is terrible. It used to be taught in schools and our parents used to be fruggle. No new cars..cash for cars...20% down on the house and no refi or second since the goal was to own it outright for retirement or sooner.
Save money every week..prepare for that strike that could come. Etc. Our parents were raised during the depression.
They didn’t have 401k’s.
The Rats will use this Rat induced ignorance to take over all retirement plans and Nanny state those. That is the only fix they want for SS.


3 posted on 11/09/2009 7:39:55 AM PST by Oldexpat
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To: PeterPrinciple

The question is not “Can you get a job?”. The question is “How far are you willing to go to get a job?”


4 posted on 11/09/2009 7:40:53 AM PST by AppyPappy (If you aren't part of the solution, there is good money to be made prolonging the problem.)
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To: blam

They called my mother an idiot for cashing hers out 2 years ago. Today she’s unemployed and living in a house that’s paid off.


5 posted on 11/09/2009 7:42:24 AM PST by cripplecreek (Seniors, the new shovel ready project under socialized medicine.)
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To: blam
I have a nephew who is in the same position as this man. He has a family to try to keep a roof over their heads, clothe and feed. He has been looking for a job since September, 2008 when Hurricane Ike closed the business he had been at for almost 6 years and hasn't been able to find anything other than an odd job here or there since.

He's held off of his retirement savings but has been told by social services here that he cannot get help as long as he has resources - meaning the 401(k)& retirement savings.

He had to quit college due to inability to pay. What are people supposed to do?

6 posted on 11/09/2009 7:42:44 AM PST by texgal (end no-fault divorce laws return DUE PROCESS & EQUAL PROTECTION to ALL citizens))
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To: blam
A lot of people think the government is going to go after the 401Ks. Maybe they want to hold on to what property they own. Without a job, they can't file chapter 13. Sad thing is, the Fed government wants to go after our property as well.
7 posted on 11/09/2009 7:45:30 AM PST by Earthdweller (Harvard won the election again...so what's the problem.......?)
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To: blam
"When in the course of human events....."
8 posted on 11/09/2009 7:53:16 AM PST by Don Corleone ("Oil the gun..eat the cannolis. Take it to the Mattress.")
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To: blam

“Your 401k or IRA has near-absolute protection in a personal bankruptcy. “

Pfffft. Your 401k has little protection from Democrats looking for money to spend.

If I were to lose my job, and it was a choice between keeping the 401k or keeping the house, I’m cashing in the 401k to pay off my house.

I expect at some time in the not too distant future, Washington will take some or all of my 401k. After all, it’s not fair that I have money in a 401k and some low life from a protected group doesn’t.

Spred yo welf.


9 posted on 11/09/2009 8:00:08 AM PST by brownsfan (The average American: Uninformed, and unconcerned.)
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To: AppyPappy

ALL the way BACK TO TEXAS!!!


10 posted on 11/09/2009 8:04:20 AM PST by RebelTXRose
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To: blam

The question is, what will the taxes on it be when you have to pull your money out?

At the moment, what you take out will be taxed at your rate plus a penalty. In 10 years, will the basic tax rate be more than that? Maybe. Even next year, the taxes + penalty will be higher than it is now.


11 posted on 11/09/2009 8:13:51 AM PST by Liberty Ship ("Lord, make me fast and accurate.")
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To: PeterPrinciple

Not correct. You can be made to sell your house if you have too much equity in it.


12 posted on 11/09/2009 8:15:15 AM PST by nicola_tesla (www.fedupusa.org)
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To: blam
"The absolutely worst thing you can do is to cash out those plans."

Worse than living on the street with kids and wife?

13 posted on 11/09/2009 8:15:45 AM PST by bsf2009
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To: brownsfan

How do you keep your paid-off house if you have no income ? What do you use to pay property taxes and keep the lights and heat on and food on the table ?


14 posted on 11/09/2009 8:17:51 AM PST by nicola_tesla (www.fedupusa.org)
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To: bsf2009

No, you’d sell the house and find a place to rent that’s a lot cheaper.


15 posted on 11/09/2009 8:19:02 AM PST by nicola_tesla (www.fedupusa.org)
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To: nicola_tesla

WHAT CAN YOU KEEP IN BANKRUPTCY?
•Most people do not lose any of their belongings in bankruptcy. The end goal of bankruptcy is to get you back on your feet financially. Therefore, your basic necessities are protected in bankruptcy, so as to help you re-establish yourself.
•The equity in your home and most of your personal belongings will, in all likelihood, be protected in bankruptcy.
•The exemptions (the bankruptcy law which protects your assets) are very complicated and you should consult an attorney to maximize the protection that you are afforded under Bankruptcy Law.


Your source, I am willing to be enlightened.............


16 posted on 11/09/2009 8:21:01 AM PST by PeterPrinciple ( Seeking the truth here folks.)
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To: nicola_tesla

If there was a house to sell


17 posted on 11/09/2009 8:23:19 AM PST by bsf2009
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To: nicola_tesla

“How do you keep your paid-off house if you have no income ? What do you use to pay property taxes and keep the lights and heat on and food on the table ?”

In my case, I assume that a job can be found, even if it doesn’t pay well. If my month bills don’t include a mortgage payment, I don’t have a lot to pay then.


18 posted on 11/09/2009 8:23:33 AM PST by brownsfan (The average American: Uninformed, and unconcerned.)
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To: blam

Not to mention that the withdrawel is taxed as a dividend profit (which means you cannot file earned income credit on your tax return) if it’s over a certain amount even if you are only withdrawing what you put in. So if I put in $4000, and withdraw $4000, no money has been made in the stock market, that amount is only what I would have taken home as INCOME if I never put it in the 401K, it’s counted as PROFIT.


19 posted on 11/09/2009 8:25:08 AM PST by autumnraine (You can't fix stupid, but you can vote it out!)
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To: brownsfan

“Your 401k has little protection from Democrats looking for money to spend.”

The article is obviously written by self-serving people in the financial services industry who are witnessing a run on the monies they control by people opting to cash out now.

The run will turn into a first-rate panic once the American public realizes the liberals are after the 401ks and IRAs to use for their spending programs.

I am 59 1/2 in 10 short months and believe me I will cash out as soon as it happens.


20 posted on 11/09/2009 8:25:14 AM PST by bestintxas
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To: AppyPappy

Not in my area. It’s not like the old days of “I just don’t want THAT job”, people are fighting for part time grocery store work in my area.


21 posted on 11/09/2009 8:26:44 AM PST by autumnraine (You can't fix stupid, but you can vote it out!)
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To: cripplecreek
"Today she’s unemployed and living in a house that’s paid off."

June 2010 ALL our real estate will be paid in full except for that biannual exercise in armed extortion called property taxes.

Never will I have a real estate loan again, either cash or unsecured will be used if I buy more!

22 posted on 11/09/2009 8:28:22 AM PST by Mad Dawgg (If you're going to deny my 1st Amendment rights then I must proceed to the next one...)
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To: texgal

I don’t know, but rather than become homeless, we took out our 401K and took the tax hit.

Sometimes you just have to do what you have to do.

I hate to tell some Freepers, but the job market is terrifying in some places. Where’s over 17% nationwide, in some places it’s over 20%. And what jobs there are, are part time and minimum wage. Not enough to keep a house going.


23 posted on 11/09/2009 8:28:33 AM PST by autumnraine (You can't fix stupid, but you can vote it out!)
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To: nicola_tesla

Some states like Texas and Florida, do not make you sell your ‘homestead’ to pay off debts. No matter how big and expensive a house you have in Florida, even if it is paid off, you can keep it in a bankruptcy.


24 posted on 11/09/2009 8:28:46 AM PST by sportutegrl (If liberals could do math, they would be conservatives.)
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To: blam
Your 401k or IRA has near-absolute protection in a personal bankruptcy.

However, it has almost no protection in a divorce settlement. If you are facing divorce and you need funds (such as to purchase a place to live), it might be justifiable to cash a 401K in. If done before the settlement, the spouse will share in the costs and penalties associated with an early withdrawl

25 posted on 11/09/2009 8:30:55 AM PST by kidd (Obama: The triumph of hope over evidence)
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To: bestintxas

My mother cashed hers out nbot because of a fear of government getting it but because she saw how fast it was eroding in the stock market.

The “experts” said the same thing they’re saying now. If she had listened, she might have a quarter of what she had when she cashed out.


26 posted on 11/09/2009 8:31:02 AM PST by cripplecreek (Seniors, the new shovel ready project under socialized medicine.)
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To: Earthdweller

A lot of people think they won’t have anything IN the 401K if the stock market crashes.


27 posted on 11/09/2009 8:32:36 AM PST by autumnraine (You can't fix stupid, but you can vote it out!)
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To: blam

My son in law filed for bankruptcy a few years back and the court took 1/2 of his 401K. This was probably before the new bankruptcy law passed by congress so I don’t know if the same applies today.


28 posted on 11/09/2009 8:32:57 AM PST by Larry381 ("in the final instance civilization is always saved by a platoon of soldiers" Oswald Spengler)
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To: sportutegrl

Yeah, this is why OJ got to live in a mansion while owing the Browns and Goldman’s millions.


29 posted on 11/09/2009 8:34:28 AM PST by autumnraine (You can't fix stupid, but you can vote it out!)
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To: Larry381
My son in law filed for bankruptcy a few years back and the court took 1/2 of his 401K. This was probably before the new bankruptcy law passed by congress so I don’t know if the same applies today.

I doubt it. IRA's, 401k's, pension benefits, social security, etc., have been exempt from creditors both in and out of bankruptcy since I was in law school 25 years ago.

30 posted on 11/09/2009 8:39:05 AM PST by Labyrinthos
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To: blam
Your 401k or IRA has near-absolute protection in a personal bankruptcy.

Notice how the author has to qualify his statement with the word near. Near-absolute must mean not absolute. If it's not absolute, it's not absolute.

31 posted on 11/09/2009 8:43:18 AM PST by CodeJockey (If you can read this thank a teacher, if you can read it in English thank a Soldier.)
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To: cripplecreek

I would not cash mine out to stay away from stock market, although it does appear weaker for the foreseeable future than historical.

Instead, I view the liberal mindset that anything in 401ks and IRas is the governement’s money as no taxes have been paid. They would like to seize a portion and issue “Social Security credits” to those who have 401ks or IRAs.

If you remove your money from them, they are that much further from goverment’s seizure.


32 posted on 11/09/2009 8:44:39 AM PST by bestintxas
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To: blam
There are other temptations to cash out - mine, for example, down some 45% and only now beginning to recover (it's at approximately the level it was six years ago). You watch that happen and you watch the fiscal idiocy that has quadrupled federal debt inside a year and you have to be tempted to cash out while you still have anything at all, especially since you won't be hit with capital gains taxes if you haven't any capital gains to report.

The thing is, there really isn't any safe haven although some are safer than others. The bond market isn't that great at the moment and they're still a promise to pay off by people who may or may not be able to. Money market and CD's, heck, even savings accounts, all depend on the financial institutions involved remaining intact. Real estate? Watch the taxes climb. And any of this that is "insured" by a government that will simply run the printing presses to pay you off in worthless money is potentially disastrous. If certain people are sitting on bags of gold like trolls in a Grimm Brothers story at least they don't wake up in the morning to find half of it missing.

33 posted on 11/09/2009 8:48:20 AM PST by Billthedrill
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To: Labyrinthos

The exception is if someone does a fraudulent transfer or preference to their account in too obvious bankruptcy planning -— e.g., write a credit card check, then deposit it in your IRA.


34 posted on 11/09/2009 8:53:54 AM PST by Jewbacca (The residents of Iroquois territory may not determine whether Jews may live in Jerusalem.)
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To: blam

I’ve contemplated cashing out to bury gold coins in the back yard.


35 posted on 11/09/2009 8:59:34 AM PST by Rio (Don't make me come over there....)
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To: bestintxas

“I am 59 1/2 in 10 short months and believe me I will cash out as soon as it happens.”

I’m with you. I have 7 months to go, hoping the rules won’t change. I’m a little concerned about the rules changing because when companies stop matching contributions on these things, there is no reason to stay in. I have some concern on stable value funds not being marked to market. Too many withdrawls may be a problem for them.


36 posted on 11/09/2009 9:05:18 AM PST by Phillipian
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To: Jewbacca

Of course. I assumed that the person was honest.


37 posted on 11/09/2009 9:12:12 AM PST by Labyrinthos
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To: autumnraine
people are fighting for part time grocery store work in my area

There's a silver lining in every cloud. I've noticed that when I go to Fast Food joints, retail stores, etc... that more and more of the clerks have been a little older and able to speak English. And, have been interested in providing good service.

Is it non-PC for me to notice things like that? :-)

38 posted on 11/09/2009 9:12:19 AM PST by wbill
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To: Jewbacca

Of course. I assumed that the person was honest.


39 posted on 11/09/2009 9:12:20 AM PST by Labyrinthos
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To: wbill

I’ve noticed that too. People who actually appreciate a paycheck are keeping the jobs. That is a positive.


40 posted on 11/09/2009 9:15:48 AM PST by autumnraine (You can't fix stupid, but you can vote it out!)
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To: autumnraine
You know, that has been my thought as well. Should I cash in some of my 401(k) and pay off my mortgage. The penalty will remain the same no matter what but the income tax you pay will be the tax rate in effect when you take the money out. It seems reasonable that if this is going to happen, better to take the tax hit before the Bush Tax reductions are taken away.

I've helped them as much as I can, buying groceries and letting them stay here with me, but it can't continue forever. I'm getting close to retirement and if there are layoffs where I work, the older folks will go first.

41 posted on 11/09/2009 9:33:20 AM PST by texgal (end no-fault divorce laws return DUE PROCESS & EQUAL PROTECTION to ALL citizens))
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To: blam

I wonder what the leftists in Congress really want.

On one hand, they could eliminate the early withdrawl penalty, encouraging people to tap their 401k and (theoretically) become more dependent on the gov’t.

On the other hand, that’s money lost TODAY that they could spend getting themselves reelected (though really, I don’t think this matters much, they can just borrow as much as they want anyway). And if people keep their 401k, it gives the gov’t an excuse to cop out of their SS payments (because you don’t “need” it).

The one thing I do “know” is that when retirement time comes for me, the gov’t WILL change the rules I’ve been living under.


42 posted on 11/09/2009 9:53:34 AM PST by Darth Reardon (Im running for the US Senate for a simple reason, I want to win a Nobel Peace Prize - Rubio)
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To: autumnraine

Somewhere in the country, someone needs workers. I know people who went to Iraq to get a job. They just mail the money home until something local opens up. I’ll do that before I raid the 401K.


43 posted on 11/09/2009 10:02:36 AM PST by AppyPappy (If you aren't part of the solution, there is good money to be made prolonging the problem.)
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To: Labyrinthos
My son in law filed for bankruptcy a few years back and the court took 1/2 of his 401K. This was probably before the new bankruptcy law passed by congress so I don’t know if the same applies today. I doubt it. IRA's, 401k's, pension benefits, social security, etc., have been exempt from creditors both in and out of bankruptcy since I was in law school 25 years ago.

I just called him to verify and yes indeed, they took $32,000 of his $64,000 401K. This was in 2001, btw.

44 posted on 11/09/2009 10:04:25 AM PST by Larry381 ("in the final instance civilization is always saved by a platoon of soldiers" Oswald Spengler)
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To: AppyPappy

Hey, can I borrow a few grand to relocate?


45 posted on 11/09/2009 10:11:33 AM PST by autumnraine (You can't fix stupid, but you can vote it out!)
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To: autumnraine

“Hey, can I borrow a few grand to relocate?”

Do I look like a bank?


46 posted on 11/09/2009 10:32:38 AM PST by AppyPappy (If you aren't part of the solution, there is good money to be made prolonging the problem.)
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To: AppyPappy

Well why not! You are awful free with the advice. Of course not really realistic for a good many people, but hey! It’s easy to armchair criticize.


47 posted on 11/09/2009 2:02:40 PM PST by autumnraine (You can't fix stupid, but you can vote it out!)
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To: PeterPrinciple
I don’t think your house can be seized either so it is not a good arguement...............

A distinction without a difference.
Sure it can't be seized on account of bankruptcy but, if you can't pay the mortgage, the bank can repossess.

So what's the difference?

48 posted on 11/09/2009 2:50:42 PM PST by Publius6961 (…he's not America, he's an employee who hasn't risen to minimal expectations.)
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To: texgal

The .mil offers many young people both a marketable trade and congress approved programs to pay off student loans. Not everyone in the military is a combat soldier, there are mechanics and medical personnel, clerks and clergy, cooks and contractor types, legal beagles, the list is endless. It helped me get on my feet (in more ways than one!) and focus priorities. Paid off all my student loans and credit card debt, automobile loan, etc. Veterans make great civilian employees after their stint is up typically too.


49 posted on 11/09/2009 3:25:39 PM PST by Freedom4US
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To: cripplecreek
My mother cashed hers out nbot because of a fear of government getting it but because she saw how fast it was eroding in the stock market.

Every 401(k) has a money market option. I think it's a requirement. So, all she had to do was transfer among funds in her account.

There was no need for her to close the account and withdraw the money, if that's what you mean by "cash out".

I understand the fear that the government is going to come after 401(k)/IRA funds. But, I think there's really no need to worry. The fastest way for the Democrats to lose their majority status would be to try to confiscate retirement assets.

If you think the health care debate was contentious, a fight over retirement assets would be incendiary.

50 posted on 11/09/2009 7:30:14 PM PST by justlurking (The only remedy for a bad guy with a gun is a good WOMAN (Sgt. Kimberly Munley) with a gun)
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