CARES Act 2020 - good time to cash out 401k?
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Architect · Wenatchee, WA · Member since 2018 · 843 posts · 907 votes
6yCashing out to just spend it (even on rentals) is risky in my opinion because you have now excepted the losses your 401k has taken because of the market crash. You are removing a safety net for your retirement as well. Putting all your eggs in one basket in risky. Plus you still have to pay taxes on it...you just dont have to pay the 10% penalty.
With that said though, I'm not against it. I am GOING to completely remove the money in my previous employers 401K but not my current one. I just have to figure out when I'm going to do it. The reason I'm doing it though is not to put it into my rentals or my construction. I am going to switch it over to a Roth IRA. That way it is still in a "retirement" account but it is now in an easily accessible account that has no restrictions or penalties for removing it in the future. I will still only do that in an emergency but I now how that option. Now I might also take some of that and put it in individual stocks that I choose but its still a buy for the long haul and not a day trading type of scenario.
And further detail as to why I'm taking it out of my previous employers 401k is that I only get to keep 60% of their employee match because I wasnt with them for over 5 years...so ist not like its making me more money or get to keep it when I retire and start pulling. But the reason I am currently waiting is that there were rumors that Trump was thinking of waiving income tax (of partially) as part of a stimulus bill. So if that happens then the taxes I would pay on pulling the 401K would go down. If that doesnt happen then I'm still back to where I was. But not paying the 10% penalty is still big enough for me to move it before the CARES Act expires.
4 Replies
- Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes6y
No it isn't a good time don't do that especially if you are a newer investor. You have to pay taxes on the money if you don't put it back in which takes a good chunk away. Also even with the recent stock market rally real estate hasn't fallen as far as stocks have so it wouldn't be a 1 for 1 value trade.
- Architect · Wenatchee, WA · Member since 2018 · 843 posts · 907 votes6y
Cashing out to just spend it (even on rentals) is risky in my opinion because you have now excepted the losses your 401k has taken because of the market crash. You are removing a safety net for your retirement as well. Putting all your eggs in one basket in risky. Plus you still have to pay taxes on it...you just dont have to pay the 10% penalty.
With that said though, I'm not against it. I am GOING to completely remove the money in my previous employers 401K but not my current one. I just have to figure out when I'm going to do it. The reason I'm doing it though is not to put it into my rentals or my construction. I am going to switch it over to a Roth IRA. That way it is still in a "retirement" account but it is now in an easily accessible account that has no restrictions or penalties for removing it in the future. I will still only do that in an emergency but I now how that option. Now I might also take some of that and put it in individual stocks that I choose but its still a buy for the long haul and not a day trading type of scenario.
And further detail as to why I'm taking it out of my previous employers 401k is that I only get to keep 60% of their employee match because I wasnt with them for over 5 years...so ist not like its making me more money or get to keep it when I retire and start pulling. But the reason I am currently waiting is that there were rumors that Trump was thinking of waiving income tax (of partially) as part of a stimulus bill. So if that happens then the taxes I would pay on pulling the 401K would go down. If that doesnt happen then I'm still back to where I was. But not paying the 10% penalty is still big enough for me to move it before the CARES Act expires. - 6yBasit SiddiqiBusiness MemberAccountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
@Cliff C.
It depends on your specifics.
Have you shown a track record in real estate to generate a consistent above-average return?
Are you in a lower tax bracket that you are in normally?(I.E. you normally are in 24% tax bracket but you worked less this year and are now in the 12% bracket)
Personally - I like have the flexibility of having the money without the strings of not being able to touch it until you are 59 1/2 or constraining you on what type of investments you can have.
Basit Siddiqi CPA4.979 Reviews - Retirement Accounts Attorney · Southfield, MI · Member since 2017 · 3k+ posts · 1k+ votes6y
Assuming that you have been impacted by the virus in one of the enumerated ways and therefore qualify, you can take a penalty-free distribution (as well as waive the 20% withholding requirement) from your 401k (assuming that the employer allows it) anytime between 1/1/2020 and 12/31/2020. You may avoid the taxes if you deposit the funds in an eligible retirement plan (which includes an IRA) within "3 years and a day" of the date of the COVID-19 distribution (note: compare to a 60-day rollover). Please note that the account into which the funds are deposited must be the same type of account from which the funds were first withdrawn (e.g. withdrawal of pre-tax funds from a 401k could be deposited in a pre-tax IRA but not a Roth IRA - "like to like").
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