WHY do they do it, make early withdrawls from their 401Ks

[mrichman333]

So why does someone who makes $136,000 Need to make a early withdrawal from a 401k for $53,000. Year before it was 9,000

I see this all the time, especially with union workers, why is it? I have some people that make low wages so they make a withdrawal for a 1,000 or so to pay bills. But the number of people I see who make over $100,000 that do it, just keeps increasing.

We're all going to end up supporting them when they get old because there will be nothing left in their 401K and SS will be bankrupt.

[Margaret CPA in OH]

Too many people who are employed and earning more than a living wage are living above those means. The constant bombardment of advertising for the must have latest technology, clothes, cars, you name it, feeds into a mindset that says they 'need' whatever. That and gambling which has become ubiquitous. It is very sad, indeed. Pensions may have been a drain on some businesses but, as you point out, there may now be a class that will have nothing left but the remaining taxpayers.

My family has always lived pretty well below our means sometimes to the dismay of our son as a youngster wearing clothes from K-Mart instead of name labels. He is now grateful and lives much the same actually in a better position with his retirement than we were at his age.

[kcjenkins]

It would be easy to understand if it was a one-time thing, caused by some catastrophic event. But when its for something non-essential [new car, remodel the man-cave, vacation to exotic places, etc] that they could have financed any of multiple ways, it's insane.

[mrichman333]

Too many people who are employed and earning more than a living wage are living above those means. The constant bombardment of advertising for the must have latest technology, clothes, cars, you name it, feeds into a mindset that says they 'need' whatever. That and gambling which has become ubiquitous. It is very sad, indeed. Pensions may have been a drain on some businesses but, as you point out, there may now be a class that will have nothing left but the remaining taxpayers.

My family has always lived pretty well below our means sometimes to the dismay of our son as a youngster wearing clothes from K-Mart instead of name labels. He is now grateful and lives much the same actually in a better position with his retirement than we were at his age.

Living below my means has always been my strategy. My husband and I should have a comfortable retirement because of it,, unlike his friend that likes to call him cheap who is still busting his butt at 65 and doesn't see an end in sight

[Jack from Ohio]

I often get the question about paying off the rest of their mortgage or credit cards. I have this response...

"How is it smart to pay off 6% or 13% money with 40% money?" "When you called me, what did I recommend to you?" (The last one usually gets a total silence on the phone or they look away from me.)

Most of the time the withdrawal puts them in the 25% bracket. Add 10% penalty and 4-5% for State and now you just paid 40% interest on the money you paid off those 6% and 13% loans with.

[joanmcq]

Yup.

I'm getting a lot more clients that are actually asking my advice about such things.....in advance! Gotta love these guys. Then I can bill and the clients get advice that saves them money, even if it's "should I pay my tax bill with a credit card or do an installment plan?". I'm selling my knowledge more and more, rather than just cranking out returns, and that feels good.

[NECPA in NEBRASKA]

I have several that do this. They paid for their daughter's wedding, bought a motorcycles and cars, just stupid stuff. Then they get tons of 1099C's for credit cards. Gambling is a huge issue and means that I have to file a lot of out of state tax returns.

[mcb39]

The wealthiest client I have has done it two years in a row. Because he spends his winters in a warmer climate, he just came in on Friday to pick up his taxes. On their way to see me, they stopped to see their banker. He told them exactly what I wanted to tell them. "Stop spending so much money!" Thankfully, they listened to the banker who had the percentages pegged exactly as printed out in their 1040 Tax Summary. Today I received a short note from them in the mail. "Thank you Marilyn for doing the best you could. Next year will be much better." It was signed with a smiley face. Apparently having over $7000 withdrawn from their checking account for the second year in a row has hit home. They are wonderful people, but they admitted themselves that that they didn't even know what they spent it on. (So, there is hope).

[Jack from Ohio]

The wealthiest client I have has done it two years in a row. Because he spends his winters in a warmer climate, he just came in on Friday to pick up his taxes. On their way to see me, they stopped to see their banker. He told them exactly what I wanted to tell them. "Stop spending so much money!" Thankfully, they listened to the banker who had the percentages pegged exactly as printed out in their 1040 Tax Summary. Today I received a short note from them in the mail. "Thank you Marilyn for doing the best you could. Next year will be much better." It was signed with a smiley face. Apparently having over $7000 withdrawn from their checking account for the second year in a row has hit home. They are wonderful people, but they admitted themselves that that they didn't even know what they spent it on. (So, there is hope).

I will bet you a block of that AWESOME Real Wisconsin Sharp Cheddar Cheese that it will be the same next year.

[MsTabbyKats]

To answer your question...

When people put the money into the 401-K....the only thing they hear is "less tax" that year. They don't hear "59.5" or 10 per cent penalty"

Then they need money...and don't have it,.....so they take the money from the 401-K.

People need to be made more aware of possible consequences before they make contributions.

[mcb39]

I will bet you a block of that AWESOME Real Wisconsin Sharp Cheddar Cheese that it will be the same next year.

Even though I don't usually gamble, you're on. Just remember that you are playing to a Royal Flush.

[mrichman333]

To answer your question...

When people put the money into the 401-K....the only thing they hear is "less tax" that year. They don't hear "59.5" or 10 per cent penalty"

Then they need money...and don't have it,.....so they take the money from the 401-K.

People need to be made more aware of possible consequences before they make contributions.

True, but after they do it the first time they now know the consequences.

[RitaB]

I see the early withdrawals for stupid stuff a lot.

And, Saturday, retirees with more pension income than I make, need an extension because they can't pay the $4,600 they owe until they take out a distribution. It's not early, but it's still stupid. They make stupid purchases. They are paying on seven, count em SEVEN, timeshares. Just pay a hotel bill, people. Or stay at the house. Geez.

Saturday they remarked, "Well, in a couple of days you can take a vacation."

I have not had a vacation since 2008. I don't even care. I enjoy my kids and my home and not being up to my eyeballs in debt. People need to work on having a life they don't have to escape from and get their together financially.

Someday when I can get all three kids together, we ARE going to the Grand Canyon. Been wanting to do that since the Brady Brunch did. I think I told you all that last year, too...

[Catherine]

My "vacation" is to put the phones (back on) forwarding to Ruby Receptionists, and spend part of the day catching up on chores, part in my garden, and part sorting accumulated detritus. Will do that for a week or two.

We actually take a one-week vacation every year. Bought a time share up in Stowe VT in the early 80's and have been going just about every summer since. Great vacation spot.