Short-term gain from 401k with employer match?

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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Reply to
blwolcha
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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

Reply to
Phil Marti

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

Reply to
joetaxpayer

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?

Reply to
blwolcha

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

Reply to
joetaxpayer

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

Reply to
Seth Breidbart

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.

Reply to
Herb Smith

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