getting 'free' money from your 401k

[cursedkings]

so i posted this in 'other other topics' but i think its more applicable here

okay, so i'm not sure this is the best place to post this, if its not, i'm sorry.

my company matches 50% on my 401k, so if i put in $10,000 the company puts in $5,000.

say i make $50,000/yr. in a year, if put 10K into my 401k, the company will match 5k. So for that year, i was taxed on 40k (the 401k investment isn't taxed). after this year, i have 15,000 in the 401k. (forget about growth/interest).

lets say the next year i do the same thing, i put in 10k, the company matches 5k. but also, at the end of the year, i take OUT from the 401k, 15,000. so my income this next year is 40,000 + 15,000 = 55,0000. my understanding is that i am taxed on my withdrawals from the 401k as if it was added income.

So is this a fool proof method to get an extra 5k of income (3k or so after taxes) every year? the only problem is it you're sorta lagged behind by a year due to the initial investment you need to start this?

and yes i know i'm better off saving the money for 30 years in the 401k. but pretend long term saving isn't my goal, and i'd much rather have more spending money year to year. this is basically just a way to get the 50% company match into my own hands, lagged one year.

thoughts?

[dseiko]

Post it in Finance & Investing - http://forumserver.twoplustwo.com/po...p;Board=stocks
Also, I'm not positive, but I believe you will also have to pay a penalty on any withdraws before your 59.5(Or whatever age it is for you)

[cursedkings]

thanks, please reply to http://forumserver.twoplustwo.com/showfl...e=0#Post8179415

thanks

[UncleSalty]

Most plans will not allow you to make a withdrawl unless you can prove some sort of hardship. If you do withdraw all or part of it there is a 10% penalty on top of whatever income tax you will pay on the money you withdrew that year. Also, I believe if you make more than one hardship withdrawl in a given period of time you are prohibited for further contributions for a certain length of time. (I'm fuzzy on the exact details there.)

All in all, the government puts some pretty strong incentives not to do this and if you think you'll need the money before you retire you should just lower your contributions, not withdraw from the account. Make sure you are at least contributing enough to get the full company match because that match is a guaranteed instant return on your investment. You always want to be getting 100% of the possible matched funds from your company, it's essentially the same as giving yourself a raise.

Also, if you need the money for some specific purpose and don't plan on pulling money out more than once or twice, some plans will allow you to withdraw up to 50% of the balance as a loan. There will be a small administrative fee and you have to pay the loan back to yourself (with interest,) but you will not incur any taxes on the amount you borrow. Also, if you leave the company you have to pay back the balance of the loan in full so don't do this unless you plan on staying a while. Your 401(k) provider should have all the details on these options, so check their website or give them a call.

[SossMan]

[ QUOTE ]
Most plans will not allow you to make a withdrawl unless you can prove some sort of hardship. If you do withdraw all or part of it there is a 10% penalty on top of whatever income tax you will pay on the money you withdrew that year. Also, I believe if you make more than one hardship withdrawl in a given period of time you are prohibited for further contributions for a certain length of time. (I'm fuzzy on the exact details there.)

All in all, the government puts some pretty strong incentives not to do this and if you think you'll need the money before you retire you should just lower your contributions, not withdraw from the account. Make sure you are at least contributing enough to get the full company match because that match is a guaranteed instant return on your investment. You always want to be getting 100% of the possible matched funds from your company, it's essentially the same as giving yourself a raise.

Also, if you need the money for some specific purpose and don't plan on pulling money out more than once or twice, some plans will allow you to withdraw up to 50% of the balance as a loan. There will be a small administrative fee and you have to pay the loan back to yourself (with interest,) but you will not incur any taxes on the amount you borrow. Also, if you leave the company you have to pay back the balance of the loan in full so don't do this unless you plan on staying a while. Your 401(k) provider should have all the details on these options, so check their website or give them a call.

[/ QUOTE ]

also, most companies have a vesting period as an incentive to retain employees. it varies, but typical is 4-5 years before you are fully vested in the amount that they contributed.
for example, the 5k that they put up the first year, you might only have access to 25% of it, or $1250 (plus the amount you put in). With the penalties and the tax expense, it doesn't really make sense to do this.