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!