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I have a serious medical issue that makes collecting my 401k benefit a near impossibility. I have about 20k saved up in my 401k and we’ll call it $60k in the market mostly in index funds/ETFs. I plan on buying a house within 2 years (I am currently living with family) and I plan to fully cash out my 401k to do so. Let’s say that I plan to do so in 8-18 months. In the meantime, does it make sense to maximize my 401k contributions or to completely eliminate them? Let’s say my company matches 6% and max contribution is 12 I believe. I would plan to cash out with the penalty within the next two years (not by borrowing from my 401k and “paying myself back with interest”)

Thank you!!

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    "I have a serious medical issue that makes collecting my 401k benefit a near impossibility". Are you saying that you are very unlikely to live to an age where you can withdraw your 401k savings without a penalty? Or something else? – Daniel Dec 4 '19 at 11:32
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    What do you mean by “paying myself back with interest” – Daniel Dec 4 '19 at 11:34
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    Why contribute to the 401K in the first place? Just hold on to your money. – Pete B. Dec 4 '19 at 12:03
  • @Daniel yes I am saying that it is more likely than not that I will live to an age where I will be able to withdraw without the penalty – Chuck0185 Dec 4 '19 at 13:57
  • @Daniel sorry I just clarified, it would be a withdrawal not the option of borrowing from myself – Chuck0185 Dec 4 '19 at 13:59
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Some points:

  1. When the company offers you a match, not contributing to your 401(k) is -- in no uncertain terms -- a pay cut.
  2. If this is your first home purchase then you'll be able to exclude $10K from the 10% penalty you'll pay on the 401(K) withdrawal.
  3. You'll have to pay income tax on the whole value of your 401(k). Thus, put aside 20-25% of the value of the 401(k) withdrawal for the taxes (federal and state) that you'll owe. Only you can figure out how much.
  4. We don't know your salary, so you will have to put pen to paper and determine whether or not the 6% pay cut offsets the increase in taxes plus the 10% penalty. (It might be worth it.)
  • RE 1. If the company match is unimpressive enough, it is possible that what extra is earned from the match is not enough to overcome the early withdrawal penalties that would be incurred from putting the money into the retirement account and then taking it back out. It could very well be that just taking the wages is better. OP would need to do some math with their real numbers to sort which is better. – R. Hamilton Dec 4 '19 at 16:16
  • @R.Hamilton that's what I said in point #4. – RonJohn Dec 4 '19 at 16:39
  • I thought ira match is free money. right? There is only a 10% penalty I thought. Even if the match was around 10% that means you breakeven. Am I missing something? – Yoshi Onimusha Dec 5 '19 at 5:18
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    @YoshiOnimusha the 401(k) company match is "free", but would be part of the total 401(k) balance which gets hit by the 10% penalty. – RonJohn Dec 5 '19 at 13:58
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    @YoshiOnimusha yes you can do a partial hardship withdrawal, and yes, if you withdraw $5000 then -- in addition to that $5000 being added to your taxable income for that year -- you'll also owe $500 as penalty. – RonJohn Dec 5 '19 at 16:47

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