blwolcha[at]hotmail.com wrote:
- quote -

Your whole scenario is based on the false premise that you
are allowed to make an earlywithdrawal from your 401K plan
when you wish. Barring certain "hardship" situations, you
are not allowed to make withdrawals while still employed by
your plan's sponsor.

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blwolcha[at]hotmail.com wrote:
- quote -

Forget taxes for a moment. Zero tax in and out.

You deposit $100, and get $11 match. You withdraw the money,
and on $111, pay $11 in penalty. My only point was a 10%
penalty is overcome by a low match.

If the first 5% is matched dollar for dollar, well, on $100,
you'd have $200 after match and net $180.

Add in the tax, and at 25% tax rate, you're down to $130,
but still ahead. But the employer will not allow this.

JOE

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- quote -

Employee puts in 10%, employer puts in 5%; that's a _50%_
match (of the amount the employee puts in). The 10% penalty
and tax are also based on the amount put in; the total
salary is irrelevant.

Seth

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joetaxpayer wrote:
- quote -

Thanks, but I really don't understand. Can you comment in
terms of the example I give in my original post? There I
describe a situation where a 5% match seems to well make up
for the 10% penalty and the tax. Where have I gone wrong in
the details?

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blwolcha[at]hotmail.com wrote:

- quote -

The tax is a wash, a match to negate the 10% penalty is
enough. An 11% match will negate a 10% penalty, and is the
breakeven. The real question is, what employer would allow
annual withdrawals from the 401(k)? They all have hardship
provisions that disallow this strategy.

JOE

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<blwolcha[at]hotmail.com> wrote:

- quote -

Probably not. Save yourself some time and check your plan's
rules. I doubt that you'll find easy access to your account
while you're still working.

--
Phil Marti
Clarksburg, MD

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Hi, I find myself sometimes thinking that there's a way to
realize a short-term gain (over one's given compensation)
from a 401k contribution, even including the early withdraw
penalty, and I'm wondering if my thinking is correct. The
question comes down to, does the "free money" obtained by an
employer match ever more than offset the penalty assessed
for an early withdrawal from a 401k plan?

For starters, assume that, hypothetically, someone had no
interest in saving for retirement (just grant the assumption
whether or not it's prudent). Assume an annual income of
$100,000 with the employer matching 50% of up to 10% of
one's income. And for simplicity, assume immediate full
vesting of the employer match, and ignore any cap
gains/losses in the 401k. Now consider:

Case 1 (no 401k contribution): Taxable income is $100,000

Case 2 (10% 401k contribution): Employer match is $5,000, so
401k acct at end of year is $15,000. Full withdrawal leaves
taxable income of the year at $105,000, plus you lose $1,500
(10% of $15,000) after taxes as a penalty.

Now what's the difference in taxes on an extra $5,000
income? Even if you assume the high 35% rate, that's only an
extra $1,750 you owe in taxes. But $5,000 > $1,750 + $1,500,
so it seems like Case 2 is the better scenario for the
person determined not to save for retirement.

Can this be right? And more generally, since employer
matches vary widely, what level of an employer match is
required to tip the scales in favor of the hypothetical Case
2? Thanks for helping me think through this!

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