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Interesting question for the tax/finance guys on here.

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Interesting question for the tax/finance guys on here.

Old 04-02-2009, 07:29 PM
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Default Interesting question for the tax/finance guys on here.

BTW, not planning on doing this but just wondering...

Normally with a 401K there are substantial penalties if withdrawing money before age 59 1/2. This is because the money is invested before tax and the earnings grow without tax.

But say a guy has been putting in an average of 15K a year for 20 years pre tax. So he has put, in real terms, a basis of 300K.

If the value of his 401K is now 200K and he withdraws the lot - is there any penalty? Or does the loss offset the original tax liability and what is left is free and clear?

If so, why wouldn't he withdraw the money and have it now free and clear to invest and manage as normal?
Old 04-02-2009, 07:44 PM
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My understanding is the money going into a 401K is not taxed, the money that grows in there is not taxed, and the money that is lost in there is not taxed. Only when you withdrawal the money, it is taxed. So, regardless of what went in or was lost in there, if you take $200k out, you are taxed/penalized on $200k.

Fwiw, I see a 401K as the scariest place to have any wealth, right now.
Old 04-02-2009, 08:01 PM
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Originally Posted by Eyeball View Post
My understanding is the money going into a 401K is not taxed, the money that grows in there is not taxed, and the money that is lost in there is not taxed. Only when you withdrawal the money, it is taxed. So, regardless of what went in or was lost in there, if you take $200k out, you are taxed/penalized on $200k.

Fwiw, I see a 401K as the scariest place to have any wealth, right now.
But if you put in 300K net and have a documented loss of 100K, isn't the tax liability on the 200K more than offset by that?
Old 04-02-2009, 08:16 PM
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the person got to loose 100K "tax free"

I don't think he is going to get a tax break because the value of the 401K went down.

Only taxed when you sell.
Old 04-02-2009, 08:38 PM
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Originally Posted by Menzies View Post
BTW, not planning on doing this but just wondering...

Normally with a 401K there are substantial penalties if withdrawing money before age 59 1/2. This is because the money is invested before tax and the earnings grow without tax.

But say a guy has been putting in an average of 15K a year for 20 years pre tax. So he has put, in real terms, a basis of 300K.

If the value of his 401K is now 200K and he withdraws the lot - is there any penalty? Or does the loss offset the original tax liability and what is left is free and clear?

If so, why wouldn't he withdraw the money and have it now free and clear to invest and manage as normal?
Originally Posted by Menzies View Post
But if you put in 300K net and have a documented loss of 100K, isn't the tax liability on the 200K more than offset by that?


Originally Posted by SurferGirl View Post
Please step away from the tax forms!
Originally Posted by SurferGirl View Post
Please step away from the computer!
Old 04-02-2009, 10:26 PM
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Originally Posted by Menzies View Post
But if you put in 300K net and have a documented loss of 100K, isn't the tax liability on the 200K more than offset by that?
You never 'realized' the $300k that went into the 401K, and won't until it is taken out and taxed -- presuming it is still there. You are deferring that portion of your income until after you retire. You can't claim any losses of money in a 401K because you never realized that portion of your salary.

I guess it is kind of like gambling. You are gambling part of your salary (401K contributions) will be worth more in the future than it would be if you realized it now.

That's my understanding -- your 401K is for you, but it is not yours (not in your possession) until withdrawn, and at that time, taxed.
Old 04-03-2009, 03:11 AM
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Not sure I understand your question but put simply if you take it out the ($200K) is taxed and if under 59 1/2 subject to the additional 10% penalty(just another tax).

The ups and downs of a 401 K do not make any difference until you take it out, probably one of the most asked question in my office this year is "can I take my 401K losses off".

Simple answer is NO you can not take the losses just like when it increases you do not pay tax on it then either. It is only taxed when you take it out which at that point is taxable income and if you take out less you pay less taxess.


Not sure what state you live in but in SC(since we like most states have income tax) if someone takes out a 401K or IRA before 59 1/2 it normally costs close to 45% in taxes for the most part(28% federal 10% penalty(goes on federal return) and 7% State tax).

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