We currently have $89500.00 in a 401 K. Can we roll over $70,000 into an IRA and cashout the rest to pay debt?

Question

We are worried about the current safety of our investment due to the current state of the economy. I understand the 10% penalty for early withdrawal, but don't know the tax implications. Would we have to pay tax on the amount we rollover into an IRA or just the cashout amount or both? We are currently getting only .04% return on our amount invested in the 401K. We would get 4.16% on an IRA for 5 years through our local bank. We just don't know which way to go.

Answer 1

Hmmmmm.   You want to take money out while the market is DOWN?  Wouldn't that be "selling low"?

An IRA is not an investment - it is a type of account (just like a 401(k).

If you want your 401(k) in safer investments, move it to the money market account, or a bond fund.

BUT AGAIN, that is a foolish idea at this time.  You would simply be locking in the losses you have suffered over the last 2 years.  Now is no time to be selling off shares that are heavily discounted.

Also, you are worried about returns, but you plan to give away 10% to the government?

YIKES!

Answer 2

If you are worried DON'T withdraw. Just move the $$$ into a different allocation.

An investment in an IRA will not "protect" you any better than a 401(k).

If you are so afraid, sell all stocks/bonds/funds you have & mov the cash into a money market account.

Or do what most are doing, sell off everything that you have in the 'shaky' companies & buy as much as you can in blue chip stocks. They ALWAYS bounce back.

Answer 3

You can, but in addition to the early withdrawl penalty you will have to pay the taxes that were due. All told, it will be a significant chunk of money. I don't know what your investments are in your 401K, but .04% is a pretty lousy return.

Answer 4

The amount rolled over directly into an IRA is NOT a withdraw for tax purposes.  The amount actually withdrawn is subject to a 10% penalty AND is added to your income when you file your tax return for the year.

As for investment options, NEITHER a 401(k) OR an IRA are actual investments.  They are SHELLS that shield an investment from taxes.  The "IRA" at your bank sounds like a CD.  4.16% is good for a CD, but LOUSY for retirement investments.  The money in your 401(k) is probably in some kind of mutual funds.  The stock market is CURRENTLY down, but has NEVER failed to make money over any 10 year period in the history of the US stock market.  That means this is the time to BUY, not sell.

The Best advise you will get here is to talk to a financial advisor that will TEACH you how to make these decisions for yourself.  You should NEVER invest because ANYONE tells you what to do.  Invest because YOU understand WHY you are investing.