Would it be a good idea to start a 401K as a recreational savings account?
Waxy asked:
For instance, say I was planning on travelling throughout Europe in a couple years. Would it be better to start a 401K (with my company matching my contribution), and take out the money with penalty in a couple years, or would it be better to put it in a high interest investment?
Thank you for all.
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For instance, say I was planning on travelling throughout Europe in a couple years. Would it be better to start a 401K (with my company matching my contribution), and take out the money with penalty in a couple years, or would it be better to put it in a high interest investment?
Thank you for all.
March 24th, 2009 at 11:06 pm
It would NOT be a good idea.
March 25th, 2009 at 5:00 am
When you withdraw the money from your 401K, you’ll pay a 10 percent penalty for early withdrawal straight off the top, *and* you’ll have to pay taxes on that money at your current tax bracket. You’d be way better off just putting it into a CD at your bank or credit union.
March 26th, 2009 at 4:57 pm
Safe investment would be your best bet. I use these guys,, but most savings accounts are fairly comparable.
401K’s value, although indirectly linked, is linked with the market. If you look at the DJIA it is at it’s lowest value in 9 years…. and so are 401Ks. Your employer will match what you put in, but if you withdraw it before you are 59 1/2 yrs old, you’ll probably have to pay it back at around 8% interest (which won’t be matched by your company). If you change employment before you finish paying your withdrawl back - it becomes a taxable expense with a 10%+ penalty.
March 28th, 2009 at 3:03 am
401k plans are not to be looked at as bank savings accounts. They are for long term retirement savings. So, it would be wise to go to your bank and open up a savings account with them. Or something with the bank that pays interest.
March 28th, 2009 at 7:42 pm
for short term (less than 20 years) investing you are better served using an outside savings plan for the simple fact of the penalty and the tax rates. As you know an early distribution penalty will be assessed and that 10% penalty is not easy to take. Certainly in a booming market it’s not as big of a deal but for most years it wipes out an entire year of earnings. The other issue is the tax rate…401k distributions get taxed at your normal tax rate….for many Americans that rate is +20% and some exceed 30%. That includes capital gains earnings….however, right now capital gains rates are at 15% which is obviously lower than normal tax rates.
Now the qualifier…taking the match might put you out on top but you’ll have to run the numbers yourself to make sure. Don’t forget to take vesting into consideration. Doesn’t do any good if the match is 3 year cliff vested and you leave in 2 years.
March 28th, 2009 at 8:58 pm
Although it is possible that the company match would cover taxes and penalties, this is not the right way to approach long-term savings. It is easy to spend and much, much harder to save. Many people have to trick themselves so the savings is painless and invisible, like setting up automatic deductions and transfers.
You should probably contribute to the 401(k) account and also start a savings account for travel, setting up both long-term and mid-term savings. You can have money withdrawn from your bank account automatically every money and put in a separate account to save for Europe. There are also lots of ways to save money while traveling that will allow you to be even closer to the people and culture you are visiting.
March 31st, 2009 at 9:26 pm
no not a good idea. if you take it out before your 59 and a half
you will pay 20%in taxs plus another 10% for taking it early.
if you only leave it in a couple years you probally won’t have enough in there to cover the taxs you would have pay theres
also a withdrawl fee each time you make a withdrawl.