Re: 401k to IRA

davdgreat wrote:
> There was a similar thread in this discussion about what Im going to
> ask but not really sure I understood.  I am 23.  I have been working
> at a good company for about 3 years now and have been contributing to
> my 401k and my employer has as well.  Over the years I have racked up
> some debtthat I would like to get rid of.
>     I was told by a friend of mine that I would be able to take about
> 2000 of my 3000 in my 401k and move it to an IRA.  That would give me
> a better tax refund.  And I was plannin on using that refund as the
> final blow to get rid of my debt.
>
> Is this true?

No...way off...first - you might not be able to even consider it. If you 
leave a job, you're allowed to move money from the old 401k plan to an 
IRA, that's called a "rollover" of the assets. But you can't rollover 
assets from your current job's active 401k plan.

But even if you can do it, if you rollover $2k from a 401k to an IRA 
there isn't any tax effect at all. A rollover is basically a change of 
the 'wrapper' where you're storing the assets, little more.

If you take money out of the IRA (or the 401k) to pay off your debt, 
there would be a tax hit - a bad one. You'd pay income tax on the amount 
you took out, plus a 10% penalty for taking an early withdrawal from 
your retirement account. So after taxes & penalties you might end up 
with $1k in your pocket from the $2k you took out.

That would be an expensive source of money to pay off a debt, and you'd 
be blowing out your retirement savings at a time when every dollar 
matters the most (these early dollars will be invested the longest).

-Tad