401k and self employment

[ungenio]

What is the name of your state? Texas.

I've recently quit a job where I had a rather large 401(k) (for my age, 25). I was putting a lot of money into it because of their 100% matching, and never really intended to leave it there for another 35-40 years. So, I'm trying to determine the best way to go about cashing it in.

At the same time that I quit, I signed a contract with the same company and now have to start worrying about self employment tax. So I'm concerned that I might have to pay self employment on any 401(k) withdrawals I make. Would that be the case, or do only normal taxes + penalty apply?

What I would really like to do is use the 401(k) to put a down payment on a first house and maybe pay off my car. Is there any way to reduce the tax hit I'd take for cashing it in? I think I read somewhere about rolling it over into an IRA and being able to withdraw $10k for a first house. Would this be the best option? Then maybe I could leave the rest alone until I see how this contract turns out (it's only for 6 months). I definitely don't want it to push me up into the 28% bracket if at all avoidable.

Once in an IRA, can I take withdrawals of any size at any time? I think with the 401(k) I either have to leave it, roll it over, or cash the whole thing in, right?

What would your advice be? Thanks in advance for any and all!

 

[Snipes5]

My advice would be, don't cash it out.

Roll it into a Traditional IRA if you want, and then you can roll part of it at a time into a Roth IRA. Once it is in a Traditional IRA, you can use $10,000 of it for a house with tax, but no penalty. When you roll it into a Roth IRA, it is taxed via your tax return, so do it slowly, or you risk a very high tax bracket.

As for paying off your car, why would you take money that will be taxed at 15-25%, then penalized another 10%, and use it to pay off a debt that is probably costing you interest of maybe 10% if that much? That seems rather foolish.

Money taken out of a 401K is not subject to self-employment taxes.

Snipes

 

[ungenio]

My advice would be, don't cash it out.

Roll it into a Traditional IRA if you want, and then you can roll part of it at a time into a Roth IRA. Once it is in a Traditional IRA, you can use $10,000 of it for a house with tax, but no penalty. When you roll it into a Roth IRA, it is taxed via your tax return, so do it slowly, or you risk a very high tax bracket.

As for paying off your car, why would you take money that will be taxed at 15-25%, then penalized another 10%, and use it to pay off a debt that is probably costing you interest of maybe 10% if that much? That seems rather foolish.

Money taken out of a 401K is not subject to self-employment taxes.

Snipes

Thanks so much! This is just what I was hoping to hear.

It looks like I'll need to do some more research into the two kinds of IRA's. From what you're saying, it looks like a Traditional will let me roll money to a Roth whenever I want (and pay tax only at that time?), and a Roth will let me cash out at any time (and pay penalty only a that time?).

The reason I thought about paying off the car was to reduce my monthly debt to pretty much nothing (I have no other debt) so that I could get a much higher house loan. I was only really considering it if I just cashed the whole thing out at once, but I don't think I'll be doing that now.

Again, thanks a ton!

 

[ungenio]

Something else just occured to me as I researched IRA's. It looks like both Traditional and Roth allow a penalty free $10k withdrawal for a first time house.
If I were to roll my entire 401k into a Traditional, and then roll $10k from the Traditional to a Roth, could I then take $10k out of each for a first house and essentially have a $20k down payment?
Or are there restrictions on the first house thing, like you can only make the the withdrawal if you have no other means to make the down payment?

Thanks in advance!

 

[Snipes5]

It isn't $10,000 out of each IRA, it's $10,000 total per tax return, sorry.

Snipes