Cashing out my 401k Questions...?
Cashing out my 401k Questions...?
Someone please tell me why this would be a bad idea. Because so far I see no down side.
I'm 29 years old and have $50,000 in my 401k. It holds mutual funds and has gotten good gains through last year, but averages around 7 - 9% annually.
If I were to cash out this 401k (I know the penalty would take me down to about $45,000) and put it into a high yield bond ETF like 'JNK'. JNK pays out .36 cents per share monhtly, and is currently trading at $40.
Which means I could get $45,000 / 40 = 1125 shares. 1125 x .36 = $405 a month, and reinvest those dividends back into the ETF every month. My total annual gain would be way over $5000 a year for the first year alone.
The only thing I can see is if the ETF drops in price, but thats why they make 'Stop Loss'...right?
Someone please tell me why this won't work.
Answers:
Judy: First of all, you'd pay not only the 10% penalty, but also income tax on the full $50K so you'd have a lot less than that left to invest.
You'd give up the tax sheltering on any gain, which is certainly worth something.
Your total gain on the ETF would not be "WAY over $5000 a year" - maybe a little over, but only if the JNK does well which is risky. And the return isn't a whole lot better than what you're already getting.
Your call though.
2010-01-14 12:42:50
Chosen Answer
Ugly: Good idea. Just keep in mind that you'll pay income taxes on the 45,000 first. You should still come out well ahead of your 401k.
2010-01-14 13:22:41
ThinKabootit: "(I know the penalty would take me down to about $45,000)"
You need to "read the instructions" again, LOL!
-To "cash out" a 401(k) you first need to leave the job it is associated with. So you'll need to find another job.
-Assuming you are age 59.5 or less, you will pay a 10% penalty AND your regular income tax (probably 28%) on all the money you take out, so your $50,000 will pay a $5,000 penalty PLUS about $12,600 in income taxes, so your $50K essentially will actually only yield you $32,400
-If you earn "more than the average bear, Booboo", then chances are good that the extra $50K (which will ALL be counted as 2010 income) will put you in a higher tax bracket and you'll lose even more of it in taxes!
The rules are deliberately designed to encourage you NOT to cash out until you are at least 60, so they are supposed to make "taking it out" something no-one in their right mind would do!
But there are always a few who still want to!
2010-01-14 15:30:46