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Thread: Liquidate 401k or Borrow Against it?

  1. #1

    Liquidate 401k or Borrow Against it?

    I heard rumors that the Government might transform 401k's into something like Social Security.

    I was thinking about paying the penalty, liquidating my 401k and putting it all into gold.

    Then I heard from someone at my company that I could borrow against the money up to something like 50 per cent and pay 4 per cent interest on it. If I chose to do this the amount the Company is matching would cover the interest. So I could borrow against it and put the money in gold, then just pay the interest. That way I'm not putting all my eggs in one basket if the Government decides to not mess with 401ks and gold takes a plunge, etc.

    Any thoughts?
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  3. #2
    Whether or not you borrow against it, it can lose value if stocks tank some more and/or (depending on your funds) the dollar devalues. So, you lose the value of your collateral, but still have to pay back the loan.

    It sounds tempting vs. paying the penalty, but you still have vulnerable assets that way. If you have zero faith in the system, then the penalty will be worth it. Right?
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  4. #3
    Strictly a rumour. One person at a Congressional hearing proposed the idea but the representatives have said they did not think it was a good one. If you liquidate your 401k you not only lose the value already gone due to the investment losses but you also lose ten percent off what is left as a penalty for early withdrawl and you will even have to pay taxes on the monies remaining. That adds up to some serious losses. Unless you need the money for some emergency I would leave it in there.

    If you do borrow- some companies have restrictions on what you can borrow for like education or a medical emergency or buying a first home- check with your plan. The loan must usually be paid back within five years. If you take money out and are not putting new money in you are no longer getting any company matching funds so that will NOT cover your interest. They are only matching your current contributions.

    http://www.smartmoney.com/personal-f...-or-403b-9657/
    Should You Borrow From Your 401(k) or 403(b)?
    ·Click here to see the worksheet below
    THESE DAYS, more than 85% of workers with 401(k)s can borrow from their plans. And a growing portion of 403(b) plan participants can too. If you've been diligently socking away a portion of your salary over the past few years (and you've had a match to boot), chances are that puts a lot of cash at your fingertips. It certainly doesn't make sense to use this money for luxuries like a backyard swimming pool or a new car. But does it make sense to tap your 401(k) or 403(b) to pay off a loan?

    Typical plans allow you to borrow up to half your vested balance, but not more than $50,000. (Some plans might restrict borrowing to specific reasons, like a home purchase, education or medical expenses.) You usually must pay the money back, with interest, over five years. But, because you are paying the interest to yourself, it isn't an additional cost. Just think of it as forced savings. If you don't repay the loan, you will owe income tax and a 10% early withdrawal penalty.

    Sounds like a pretty good deal, right? Well, there are a couple of big drawbacks. First, you are giving up the tax-free compounding of the money you withdraw. That could lead to a signficantly smaller nest egg come retirement. Also, if you leave your current employer for any reason, you will probably have to pay the loan back immediately or face taxes plus a penalty.
    Let's say you had $100,000 in a 401k and decided to liquidate it. Ten percent off the top is $10k so you have $90k left. Taxes- lets make it easy and figure 25%. You are down to $67,500- losing about one third of your money straight off the top. If the value of your portfolio does not change, you would need to get a 50% return on something else (like gold) to be able to replace the money you are losing (not including the transaction costs of the other investment and the taxes on the gains of the asset) by closing your 401k. If the assets which were in the 401k do go up then you need an even higher return on your alternative investment.
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  5. #4
    Will America as we know it be around in 25 years when I am retirement age? That's an additional question I ask myself as I decide what to do with my 401k from a former employer, too.
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  6. #5
    You'll never regret cashing out.

    You either get what's left of it now, with a penalty subtracted, or none of it later. Easy decision.

  7. #6

    Better yet, forget the penalty

    Open up a self directed IRA, a gold trading corporation, and loan the corp money from the self directed IRA. Keep plenty of "inventory" on hand though.


    Essentially if your transaction is an arms length transaction that is a legitimate investment you can probably do it this way. For example if you wanted to loan money from your IRA to your wholly owned corporation it would probably be allowed if you charged your corporation the same interest rates your bank would charge.

    Wallah, a penalty free cashout.

  8. #7
    Quote Originally Posted by AmericasLastHope View Post
    I heard rumors that the Government might transform 401k's into something like Social Security.

    I was thinking about paying the penalty, liquidating my 401k and putting it all into gold.

    Then I heard from someone at my company that I could borrow against the money up to something like 50 per cent and pay 4 per cent interest on it. If I chose to do this the amount the Company is matching would cover the interest. So I could borrow against it and put the money in gold, then just pay the interest. That way I'm not putting all my eggs in one basket if the Government decides to not mess with 401ks and gold takes a plunge, etc.

    Any thoughts?

    First of all keep in mind that the money in 401K's is only a tax deferred thing... eventually you WILL be paying income taxes on it; of that there is no doubt.

    The first question to ask is: "Do you expect income taxes will be LOWER in the future than they are now?"

    Note that the answer to that is potentially DIFFERENT for everyone. If you have a year where you are out of work -- then in THAT year, the income tax rate on anything you take out of a 401L (or IRA) may be significantly LOWER than it is at any other time in your life (bar retirement, or even including retirement if they raise taxes substantially in between now and then.)

    The second question to ask yourself is: "The government has promised not to tax it until you retire, and it has promised in the meantime to allow you to have some control over where it is saved, and eventually when and how much you can draw out when you retire (if you live that long and you are able to retire) ...Will the government keep that promise? Or will they change the law in an arbitrary fashion, and without notice?"

    That's a "bet" you have to decide whether you want to gamble on.


    Personally, I think that when an "appropriate" crisis comes along, the government will take advantage of that as an opportunity to roll-up ALL of the various retirement schemes -- pensions will be integrated with 401K's, IRA's and Social Security -- and they will then "sell" that to the public as a means of "salvaging" everyones' retirement funds (perhaps AFTER they perform the switch in a coup de main) and then they can "control" your access to those funds, rationing out only what they want you to have.

    I know that sounds somewhat far-fetched, but seriously, how many "unprecedented" things have already happened this year?

    How many far-fetched things did FDR do in his "bold" actions during his first 100 days in office? Confiscate everyone's gold? That would be insane! Devalue the currency and sell the public that inflation is their "friend" and a good thing ... immediately after confiscating their gold? Now you're really bonkers!

    All they would have to do to "calm" the public would be to agree to restore everyone's 401K values to the "peak" they were at say in October of 2007. (And why not... dollars are just "digits" aren't they? Haven't the fed and treasury and Congress already proven that they think that way?)

    For most people it's a moot point. They are "locked in"
    and cannot access their 401K's until and unless they quit their job (and people are not willingly doing that these days). Plus, the temptation of the "matching funds" is hard to resist (though in a lot of cases, companies are already suspending THAT provision, and in an arbitrary fashion... btw I predict a lot of lawsuits over that.)

    If you can do so, then at a minimum I think people should consider doing a rollover of whatever they can from their 401K into a self-directed IRA (some people have previous 401K balances that were previously "rolled-up" when they changed companies; and those funds should be accessable). IRA's are probably the least vulnerable to government "seizure" (whereas most of Congress thinks 401K's are somehow "government money" that they are just graciously allowing you to "control" ...temporarily.)

    And in a self-directed IRA, you have a much wider choice of things to invest in -- even Gold and silver via ETF's if you want (not as good as physical coin, but still better than Stocks or Mutual Funds that -- for all you know -- might be partially handed off to someone like Bernie Madoff).

    As for the whole "borrow against the 401K" -- I looked into that a few years ago, and the rules and constraints were enough to drive me up a wall. Since I left my last salaried position in early 2006, it became a moot point.

    Keep in mind that whatever you decide to do -- getting money OUT of a 401K is not something that is done in a single day. They drag the process out over the course of several weeks, snail-mailing papers, getting "permission" signatures from the 401K "custodians" etc. The point being that IF something insane is announced as a "policy change" ...at that point, it will be too late to do anything about it (even if they don't "freeze" the accounts at the same time they make the announcement).


    In the end, you have to do your OWN research and make your own decisions; and NO ONE really has a clue what we'll be facing next year, much less ten years down the line... all we have is speculation, so to my mind, all "advice" -- whether expert or not -- is liable to be wrong.

    Safest and most conservative bet is to REALLY diversify -- the downside is that means you almost certainly WILL lose a significant portion of your savings. But the upside is that by doing so you will save a significant part as well -- it's like betting 1/2 on black, and 1/2 on red at the craps table in Vegas; you KNOW you will lose one of those bets, but if you are "all in" on either black or red you have a 50/50 chance of winning BIG, but face an equal 50/50 risk of losing everything. And yes, none of us want to play "craps" -- but the government has a gun to our collective heads and we don't really have a choice. Alas, choosing NOT to play is the one option we do not have.

  9. #8
    put your 401k into gold & silver eagles, then take physical possession.

    or cash out and buy commodities while the temporary deflation makes supplies cheap.

    after low prices cause production to halt, prices will skyrocket to hyperinflation.
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  11. #9
    Quote Originally Posted by tron paul View Post
    put your 401k into gold & silver eagles, then take physical possession.

    or cash out and buy commodities while the temporary deflation makes supplies cheap.

    after low prices cause production to halt, prices will skyrocket to hyperinflation.
    I told my parents and family something similar to this, they just laughed at me. But In a few years I'll get the last laugh, after I've put thousands into Gold and Silver and they are left with almost nothing.

  12. #10
    Quote Originally Posted by nick.mccann View Post
    I told my parents and family something similar to this, they just laughed at me. But In a few years I'll get the last laugh, after I've put thousands into Gold and Silver and they are left with almost nothing.
    When they start calling you up asking you for money it won't be funny. It's a sad day when the reality hits that your family is desperate for money and it's because you didn't get through to them. I've already had it happen.


    Now on this 401k thing... I had a small 401k from a previous employer that I'm rolling over into an IRA with an online brokerage where I can direct the funds into overseas trading and foreign currency. It won't be much, but it'll help me diversify.
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