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

The Market Ticker ^ | 11-08-2009 | Karl Denninger

[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]

[texgal]

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.

[Darth Reardon]

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.

[AppyPappy]

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.

[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.

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

[autumnraine]

Hey, can I borrow a few grand to relocate?

[AppyPappy]

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

Do I look like a bank?

[autumnraine]

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.

[Publius6961]

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?

[Freedom4US]

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.

[justlurking]

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.

[cherry]

why should people have 401k's anyway?..seriously....Pelosi and her creeps want to take over our retirements and too bad for us that have saved a few dollars....

work and saving does not pay...

your kids will get free college and you'll get free healthcare if you don't work and have no money....

[cherry]

think of how many more have had serious hours cut back.....its scary times....

[texgal]

He tried to get into the military earlier in the year. The Army recruiter was so overwhelmed with applicants who had college degrees they did not even want to talk to him. They told him they had more than they could handle at the time and to call back later. Mike has a GED and was working on obtaining a degree in junior college. His grades were not the best and he is ADDHD which sometimes makes his behaviour a bit different than others who do not have this.

Perhaps this is something he should try again. Thanks for the information.

[PeterPrinciple]

So what's the difference?

---

The discussion was using the money to pay off house mtg. Argument against it was that money was protected in 401k from bankruptcy. It is also protected in house equity.

In bankruptcy, your equity is protected and you can reaffirm your home mortgage and discharge other debt. These are current rules but under socialism, all bets are off.