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I recently ran into a family friend with a new car (VW Golf), and as a self-proclaimed-car-guy I had to ask a few questions about the deal. Comes to find out that he cashed some of his 401K to buy it cash. "Due to Covid, the government is allowing penalty free early withdrawal, up to $100K"

Apparently, he's not the only one. While getting coffee and a bagel, I overheard two guys talking about "using penalty free 401K money to buy a car". According to one of them, he already took out all $14k and stashed it into his savings account for easier access when needed......."I only needed 4k to pay debit, but I'd rather have the money in my account instead of the company's account"

This makes me wonder how many out there are doing the same.
 

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that seems reckless... but... if hes buying some appreciating collectible thing and "investing" maybe hes found a way to justify it :LOL:

quick google suggests that in order to qualify for the 100k withdrawal you have to meet certain covid-job-related-impact conditions, which really makes using the money for buying fun cars pretty stupid.
 

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I’m sure there are far too many people doing that because so many people think they get a better deal if they pay cash(they don’t typically) or they “don’t want a monthly payment”

I know this is obvious but what a dumb move. Why would you ever think that taking money out of an interest earning account that is tax advantaged to buy a car is a good idea when interest rates are so low and many manufacturers are offering 0% loans. It is truly amazing how little people understand about money


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Pretty stupid, and I do think you need to prove financial hardship to take early withdrawals. Just think of the 10, 20, 30 years of compound growth on that $20k that now won't be realized and suddenly that car is a hell of a lot more expensive than $20k or whatever. Now it costs $20k + X years of growth @ X %
 

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Smart move.
 

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Pretty stupid, and I do think you need to prove financial hardship to take early withdrawals. Just think of the 10, 20, 30 years of compound growth on that $20k that now won't be realized and suddenly that car is a hell of a lot more expensive than $20k or whatever. Now it costs $20k + X years of growth @ X %
Using the rule of 72 and 8% interest, the $20k would be worth $40k 9 years later, $80k 18 years later and $160k 27 years later.
 
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I've never needed to dig into my 401k for anything. I hope it stays that way.

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If you set up your own personally managed 401k with what is called ‘checkbook control’, you can actually loan yourself money out of it, up to $50,000 if I recall correctly.

Can be smart in some situations, but you basically have to treat it as if you had that $50k sitting around anyway.

Oh, and don’t forget to pay in all back in time.. interest included (I believe the minimum federal AFR applies, but I’m not a tax attorney ... yadda yadda)
 

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i wonder if these people even understand how this actually works, and if they understand the difference between an early withdrawal and a loan against a 401k. Not to mention that penalty free doesn't mean it's free money, if you aren't paying it back you still have to pay taxes on the withdrawal.
 

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No Integra Type-R content?

TCL is slacking.
 

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What the—? Hell no. The only time I’d ever do this is for a down payment on a property, with the expectation that I could repay it when another property sold (buying new house before selling current). And i should never be in a position to need to do that.
 

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If you set up your own personally managed 401k with what is called ‘checkbook control’, you can actually loan yourself money out of it, up to $50,000 if I recall correctly.

Can be smart in some situations, but you basically have to treat it as if you had that $50k sitting around anyway.

Oh, and don’t forget to pay in all back in time.. interest included (I believe the minimum federal AFR applies, but I’m not a tax attorney ... yadda yadda)
It used to be $50k or 50% of vested amount

Then it got trumped up to $100k.

At the current market trend, this is NOT a good idea...

You still have to pay back the 401k LOAN, but you're losing ALL of the compounded interest on the amount you took out as a loan.

It makes "more" sense to do it if you time it right before a market drop and then you don't lose anything because it would have lost value in the market crash.
 
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