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Updated over 7 years ago on . Most recent reply presented by

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Jeff Goff
  • Saratoga Springs, UT
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401k early withdrawal vs Withdraw later at higher tax rate

Jeff Goff
  • Saratoga Springs, UT
Posted
I have a 401k from an old job that I am trying to gain access to for investing. The amount is roughly 24k. If I stay in the W2 workforce I will retire in 30+ years. Since I no longer work for that job, I am no longer contributing to that 401k. Based on the analysis from Vanguard (they have my 401k) it will get me about $500 per month in cash flow when I retire. I feel like I can better that number. I have looked into self directed IRAs or solo 401ks, but am seriously leaning towards just cashing it out. My reasoning is that right now I am in the 25% tax bracket. Assuming all goes well with my future endeavors (I know that is a big assumption) I am hoping to move up to the 35% tax bracket by the time I retire. The way I see it, I take the 25% tax rate now plus the 10% early withdrawal penalty now, or pay 35% later. Based on that math I pat 35% of 24k now, or 35% of 100+k when I hit retirement age. Wouldn't it just make sense to pull it out now? What else am I missing? Thanks in advance for the help.

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Brian Eastman
  • Self Directed IRA & 401k Advisor
  • Wenatchee, WA
2,536
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2,878
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Brian Eastman
  • Self Directed IRA & 401k Advisor
  • Wenatchee, WA
Replied

@Jeff Goff

Have you considered converting the money to a Roth IRA? That would allow you to pay tax on the seed today, then have a tax-free crop in the future. It would cost you the 25% current tax rate to convert the money today (with no 10% penalty). You would then have a significant amount of tax-free money in the future.

I ran a quick calculator and if you do not add to the $25K with new contributions and average 7% return, it would be worth $190K in 30 years.

You could do that within the conventional brokerage sphere or with a self-directed IRA for investing in real estate. Either way, you could really come out way ahead.

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