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401k getting clobbered? Cash out!

#1
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12/17/08 at 11:42am
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Some guy in my office has lost so much money in his 401k, he has this "brilliant" plan of cashing out what remains and writing off the losses somehow. He says the tax penalty for cashing out early will be offset by the fact that he's writing off the losses. Is there any validity to this? I don't know enough about tax law to know whether there is any justification for doing this, but it sounds reckless and foolhardy to me. I've always been told you should NEVER cash out your 401k before retirement. Anyone know of anyone who has done this in light of all the recent losses?

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#2
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12/17/08 at 1:26pm
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Re: 401k getting clobbered? Cash out!

Sounds reckless and foolhardy to me, too. I don't think it's going to work out for him the way he planned.

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#3
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12/17/08 at 1:36pm
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Re: 401k getting clobbered? Cash out!

No - you can't write off the losses in your 401k. In order to write off losses you have to have an actual tax loss - which means your proceeds have to be less than your tax basis.

In your 401(k) you have a tax basis of $0. Meaning that you have to pay taxes on your entire distribution, regardless of gain or loss.
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#4
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12/17/08 at 1:57pm
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Re: 401k getting clobbered? Cash out!

Quote:
Originally Posted by Bob McLaughlin
Some guy in my office has lost so much money in his 401k, he has this "brilliant" plan of cashing out what remains and writing off the losses somehow.
This isn't the first time in history that 401k's have lost enormous value. Does this guy really think someone wouldn't have done this before if it really worked -- say, during the dot.com bust or after the '87 crash?
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#5
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12/17/08 at 5:40pm
  • Joined: March 2001
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Re: 401k getting clobbered? Cash out!

If he wants to "cash out", he should move the funds to a cash or stable value fund within the 401k. He gets "safe" while not suffering penalties or premature access to his 401k.
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#6
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12/17/08 at 6:08pm
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Re: 401k getting clobbered? Cash out!

I'm just waiting this one out. I'm only 39 so no reason to get jumpy. Keep things where they are, keep pouring money in to my 401k (great buying opportunity), and wait for the eventual rebound.
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#7
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12/17/08 at 7:26pm
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Re: 401k getting clobbered? Cash out!

Quote:
Originally Posted by Bryan X
I'm just waiting this one out. I'm only 39 so no reason to get jumpy. Keep things where they are, keep pouring money in to my 401k (great buying opportunity), and wait for the eventual rebound.
Same here (couple years younger). The worst thing a person could do is to buy high and sell low, especially if retirement is not imminent.

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#8
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12/17/08 at 8:52pm
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Re: 401k getting clobbered? Cash out!

I'm still investing the same I was 2 years ago. Only reason to cash out is if you are retiring in a couple years or honestly believe it's never going back up (which would imply that we will continue down the downward spiral, eventually there would be no US, and russia would take over
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#9
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12/17/08 at 10:15pm
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Re: 401k getting clobbered? Cash out!

Don't overthink the market. I've got some money set aside to pay off my students loans in mutual funds, but right now I'm making my monthly payments out of pocket. Even with the accrued interest, I figure I'll probably in better shape waiting for the rebound in a couple years than cashing out now and having to pay the interest on the remainder for the years the mutual funds don't have enough left to cover.
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#10
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12/18/08 at 6:52am
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Re: 401k getting clobbered? Cash out!

Thanks. I was able to dig up an article where someone asks this exact question, and I forwarded it to the guy in my office.

Here's the link:
Tax time is here, so plan to minimize 401(k) losses | Deseret News (Salt Lake City) | Find Articles at BNET

I think he became disgusted when he calculated that his 401k is worth less than what he had been putting into it all these years. But he is doing one of those 'self-managed' options and he's probably one of the last people who should be choosing that option.

Myself, I'm a "set it, forget it" kind of investor, although I am going to have to make some adjustments as I age.

"I'LL SHOW YOU THE LIFE OF THE MIND!!!" - Barton Fink

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