Strategically taking a 401k loan and/or no-penalty withdrawal

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Re: Strategically taking a 401k loan and/or no-penalty withdrawal

Post by CT-Scott » Wed Apr 01, 2020 1:19 pm

Xan wrote:
Wed Apr 01, 2020 12:08 pm
Why would I want to take money out of my IRA? Isn't the point to put money into it? I mean, yes, if I need it to live on, which is what this is for. It doesn't seem like a useful tool otherwise.
We're looking to move, and I like the idea of taking a 401k loan (even just super-short-term where I'd plan to pay it back early) to have cash on hand to buy a new house before selling my current house. Better still, perhaps, if I feel that housing prices could fall and I could pick up a better bargain. I don't expect mortgage rates to rise significantly in the forseeable future.

Tied to this is a belief that the stock market will be, at best, stagnant for a long while, such that the 5.25% interest rate I pay back to myself would provide better returns than I would get by leaving that money inside of my 401k.

Also consider...if I lose my job while I've got that loan out and am unemployed for a while, the tax hit I'd have to pay (from the loan default) would be minimized by the lower tax bracket I'd be in while I was out of work.

The term "dry powder" is often used to describe someone who is getting ready to take advantage of some stock price "deals" but can also be applied to "deals" outside of the stock market, no?

This logic probably doesn't make much sense for a 25-year-old who hasn't accumulated a whole lot in their 401k yet. If you're a bit older and have accumulated a lot more, borrowing $50K for a while shouldn't be a big hit on your retirement portfolio, and would give you some freedom and calm during an economic recession.
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Re: Strategically taking a 401k loan and/or no-penalty withdrawal

Post by Xan » Wed Apr 01, 2020 1:54 pm

Makes sense, thanks.
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Re: Strategically taking a 401k loan and/or no-penalty withdrawal

Post by vnatale » Wed Apr 01, 2020 2:54 pm

Along these lines....changes related to the Act just passed....Both Mathjak and I are both great fans of Michael Kitces...I am now reading through his, as usual, excellent, extremely thorough analysis here:

https://www.kitces.com/blog/analyzing-t ... 2-52304873

Vinny
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
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Re: Strategically taking a 401k loan and/or no-penalty withdrawal

Post by mathjak107 » Wed Apr 01, 2020 3:06 pm

In my last company my buddy decided to take a 401k loan to buy a new car ..well the company fell on hard times ,was taken over but the 401k was closed ....he had to pay back the entire loan and could only refinance the car , not at the low rates the factories offered but at a ridiculous rate as a used car..

Your pay back time frame you planned on is only as good as your company solvency
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Re: Strategically taking a 401k loan and/or no-penalty withdrawal

Post by Xan » Wed Apr 01, 2020 3:15 pm

mathjak107 wrote:
Wed Apr 01, 2020 3:06 pm
In my last company my buddy decided to take a 401k loan to buy a new car ..well the company fell on hard times ,was taken over but the 401k was closed ....he had to pay back the entire loan and could only refinance the car , not at the low rates the factories offered but at a ridiculous rate as a used car..

Your pay back time frame you planned on is only as good as your company solvency
That concern wouldn't apply to an IRA, though, right?
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Re: Strategically taking a 401k loan and/or no-penalty withdrawal

Post by mathjak107 » Wed Apr 01, 2020 4:05 pm

An ira loan ? Does such a thing exist ? I don’t think so ..new bill only waves penalty on money pulled out ..I saw nothing about a loan process
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Re: Strategically taking a 401k loan and/or no-penalty withdrawal

Post by Xan » Wed Apr 01, 2020 4:18 pm

It seems to allow up to $100,000 to be withdrawn from an IRA or 401(k) with no penalty. Seems that the tax still needs to be paid.

Sorry, I don't have a 401(k) and I have no idea how a loan out of one works. I'm just (personally) interested in the no-penalty withdrawal, although it doesn't seem like a good idea in most cases.
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Re: Strategically taking a 401k loan and/or no-penalty withdrawal

Post by CT-Scott » Wed Apr 01, 2020 4:29 pm

mathjak107 wrote:
Wed Apr 01, 2020 3:06 pm
In my last company my buddy decided to take a 401k loan to buy a new car ..well the company fell on hard times ,was taken over but the 401k was closed ....he had to pay back the entire loan and could only refinance the car , not at the low rates the factories offered but at a ridiculous rate as a used car..
Are you saying that he didn't lose his job but they called the loan? That would be pretty unusual/bizarre. Whereas, if he lost his job, he could have chosen to default on the loan, in which case he'd still have to pay the 10% penalty and taxes on whatever the balance was at the time, but if he was out of work, he would have likely fallen to a lower tax bracket.
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Re: Strategically taking a 401k loan and/or no-penalty withdrawal

Post by mathjak107 » Wed Apr 01, 2020 5:08 pm

The company was taken over by a new company after it failed , no one lost their job ....the old 401k no longer exists to pay it back to...that is what happens when your company fails ...

In fact for the rest of us it was a learning experience...when the company no longer paid the 401k administrators the 401k was locked and liquidated ..it then gets turned over to the courts in receivership...... all money got a court appointed custodian ...it took many months for us to be able to transfer the money out in to our iras .......

We worked there for decades ...we never were aware at how bad things were for the company until the end ....I learned I would never leave a 401k with a company I wasn’t working at.

So loans are only good as long as you work for the company or the company exists ....

You can’t pay back a loan if you no longer work for the company beyond 60 days
Last edited by mathjak107 on Wed Apr 01, 2020 5:26 pm, edited 2 times in total.
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Re: Strategically taking a 401k loan and/or no-penalty withdrawal

Post by CT-Scott » Wed Apr 01, 2020 5:25 pm

OK, thanks for the added detail. I'm not particularly concerned about any of that, to be honest. I understand that should I take a 401k loan there could be scenarios where I'd suddenly find that I needed to default on the loan and pay the necessary taxes. That would not be my plan, but I'm willing to take that risk.

Getting back to the "withdrawal" side of this...it appears that you can take a $100K withdrawal with the intention of treating it like a 3-year loan with the option of waiting 3 years to then pay it back in full. So, one could take that $100K and put it in a CD, for example, earn interest, then pay the full amount back after 3 years. Of course, most would expect/hope that other fund options inside of your 401k could earn more interest over 3 years than you'd earn with a CD, but depending on how this current crisis goes, who knows. And putting in a CD is just one no/low-risk option. You could, of course, choose to "gamble" with it (or some part of it) via a higher-risk option.
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Re: Strategically taking a 401k loan and/or no-penalty withdrawal

Post by mathjak107 » Wed Apr 01, 2020 5:30 pm

CT-Scott wrote:
Wed Apr 01, 2020 5:25 pm
OK, thanks for the added detail. I'm not particularly concerned about any of that, to be honest. I understand that should I take a 401k loan there could be scenarios where I'd suddenly find that I needed to default on the loan and pay the necessary taxes. That would not be my plan, but I'm willing to take that risk.

Getting back to the "withdrawal" side of this...it appears that you can take a $100K withdrawal with the intention of treating it like a 3-year loan with the option of waiting 3 years to then pay it back in full. So, one could take that $100K and put it in a CD, for example, earn interest, then pay the full amount back after 3 years. Of course, most would expect/hope that other fund options inside of your 401k could earn more interest over 3 years than you'd earn with a CD, but depending on how this current crisis goes, who knows. And putting in a CD is just one no/low-risk option. You could, of course, choose to "gamble" with it (or some part of it) via a higher-risk option.
The loan is actually from assets liquidated in your 401k .. The money usually comes out of your 401(k) account balance. In many plans, the money is taken in equal portions from each of the different investments you hold. For instance, if you have money in four mutual funds, then 25% of the loan total comes from each fund.

In other 401(k) plans, you may be able to designate which investments you'd prefer to tap to put together the total loan amount.

So you don’t get to double dip ,keeping the money invested while borrowing it out and investing it elsewhere
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Re: Strategically taking a 401k loan and/or no-penalty withdrawal

Post by CT-Scott » Wed Apr 01, 2020 6:04 pm

mathjak107 wrote:
Wed Apr 01, 2020 5:30 pm
The loan is actually from assets liquidated in your 401k

...

So you don’t get to double dip ,keeping the money invested while borrowing it out and investing it elsewhere
Of course. I would have never thought it worked any other way. But if the stock market continues to fall (and eventually just be stagnant) over the next 3 years, the converse point is that you have protected/grown your money more than you would have had you left it in there.
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Re: Strategically taking a 401k loan and/or no-penalty withdrawal

Post by mathjak107 » Wed Apr 01, 2020 6:40 pm

CT-Scott wrote:
Wed Apr 01, 2020 6:04 pm
mathjak107 wrote:
Wed Apr 01, 2020 5:30 pm
The loan is actually from assets liquidated in your 401k

...

So you don’t get to double dip ,keeping the money invested while borrowing it out and investing it elsewhere
Of course. I would have never thought it worked any other way. But if the stock market continues to fall (and eventually just be stagnant) over the next 3 years, the converse point is that you have protected/grown your money more than you would have had you left it in there.
Most 401ks have much more conservative investments so I can’t see it really being worth getting involved in playing with loans and cds
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Re: Strategically taking a 401k loan and/or no-penalty withdrawal

Post by vnatale » Wed Apr 01, 2020 7:25 pm

mathjak107 wrote:
Wed Apr 01, 2020 5:08 pm
The company was taken over by a new company after it failed , no one lost their job ....the old 401k no longer exists to pay it back to...that is what happens when your company fails ...

In fact for the rest of us it was a learning experience...when the company no longer paid the 401k administrators the 401k was locked and liquidated ..it then gets turned over to the courts in receivership...... all money got a court appointed custodian ...it took many months for us to be able to transfer the money out in to our iras .......

We worked there for decades ...we never were aware at how bad things were for the company until the end ....I learned I would never leave a 401k with a company I wasn’t working at.

So loans are only good as long as you work for the company or the company exists ....

You can’t pay back a loan if you no longer work for the company beyond 60 days
I wonder how many people when applying for a job at not a large company (certainly non-public) ever ask to see the company's financial statements so as to form some kind of judgment on the future stability of the company?

As an accountant I'm always looking at the money angle for everything, like when I go to a live music show -- counting people there, how much they paid, total $$$ brought in from just ticket sales. How much could the musicians be getting paid based upon that. However, I find that for most people finances are not a particular interest nor something that will be investigated.

But, of course, I am almost certainly not describing anyone who is reading this!

Vinny
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
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Re: Strategically taking a 401k loan and/or no-penalty withdrawal

Post by mathjak107 » Thu Apr 02, 2020 6:51 am

the problem is you can't spend a closet at the supermarket ... any equity in a house is trapped . it can not come out ... sure you can use it as collateral for loans but today you need the same criteria to get a heloc as a mortgage ...

2008 saw helocs cancelled and closed as well . so i prefer liquidity to playing what if "s ...

i have always planned around what was , what is and what stands a reasonably decent chance of continuing .... ss is already means tested in a few different ways ....it is already means tested tax wise and benefit wise ...the lowest earners earn 6x the benefit per dollar paid in as the highest wage earners .

What most people don’t know is that our employment tax dollars don’t all buy the same amount of future benefit. Some of our employment tax dollars buy six times as much in benefits as others.

According to the most recent Trustees Report, for instance, the first $767 of “average indexed monthly earnings” (a complex formula that adjusts earnings over time) is credited at a 90 percent rate, assuring the lowest wage workers of a retirement benefit nearly equal to their earned wage.

Wages of more than $767 a month but less than $4,624 a month are credited at a 32 percent rate. This means retirement benefits increase at a much lower rate. The benefit pinching, however, does not end there.


For wages of more than $4,624 a month up to the wage base maximum ($113,700 for 2013), the crediting rate is only 15 percent. Thus, all the wages earned — and employment taxes paid — over that $55,488-a-year “bend point” gain benefits at only one-sixth the rate of the lowest wage earners.

In effect, the Social Security benefits formula functions as a sharply graduated benefits “tax,” reducing the benefits that accrue to higher wages by 85 percent. The higher your means, the lower your benefit.
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Re: Strategically taking a 401k loan and/or no-penalty withdrawal

Post by CT-Scott » Thu Apr 02, 2020 7:54 am

tomfoolery, thanks for contributing to this thread. I'll have to mull over more some of what you discussed, but I'm curious about your initial idea (buying a house)...curious why you would prefer to buy the house outright, versus getting a mortgage at the current low rates.

Edit: To clarify...I know that a lot of people get satisfaction from paying off their mortgage. I could see doing that if I had already "won" and felt good about all of my other savings (in taxable and non-taxable accounts), had no other debt, and felt good about being able to draw from my savings to sustain my living expenses. So, I guess it would be the last thing I'd do. Maybe that describes you. I'm just curious as to your personal perspective on that.
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Re: Strategically taking a 401k loan and/or no-penalty withdrawal

Post by CT-Scott » Thu Apr 02, 2020 8:28 am

tomfoolery wrote:
Thu Apr 02, 2020 2:14 am
On a side note, I don’t want more than $300k in my 401k total as I enter retirement age because the RMDs will be too large and I suspect social security will be means tested by the time I get to 65. So this is a way to reduce my 401k now. I’d rather have $100k more of home equity held in a trust than $100k more in my 401k which may make me ineligible for social security in 25 years.
This is interesting. Can you provide more info as to your approximate age and how much you expect/hope to have in your taxable accounts by 65? (Edit: Also, why "65"? RMDs don't start until 72, right?)

I'm 48 and we've traditionally done a poor job of saving. We make good money, but spend too much. But we used to carry credit card balances, and a combination of spending a little less and making more allowed us to at least get to the point of spending within our means. Several years back we finally got to the point of maxing out our 401k contributions, contributing to Roth IRAs (backdoor), maxing out an HSA, and building up a decent emergency fund (enough to cover several months, not years). But other than some Apple stock we bought about 10 years ago (and recently sold - with the intent of using towards a new house or paying off part/all of my daughter's college loans), we hadn't yet gotten to the point of dedicating extra dollars towards investments in taxable accounts.

With the corona-market in full effect, I'm not anxious to do that right now, but hope to start once we're settled in the new house (if not sooner). But the point of my rambling is to go back to the part of your post that I quoted...were we possibly "doing it wrong" by maxing out our 401k accounts and instead should we consider transitioning to reducing our 401k contributions (contribute only up to what our employers will match/max out at) and instead diverting some of those funds to taxable investment accounts? Up to now, I've figured that because we each make a decent amount (approx $200K/year each) having those 401k contributions reduce our AGI made the most sense. FWIW, you specifically mentioned not wanting more than $300K in your 401k. I'm currently at around $400K in my 401k (I'm 48) and my wife (54) is at around $450K.
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Re: Strategically taking a 401k loan and/or no-penalty withdrawal

Post by vnatale » Thu Apr 02, 2020 6:18 pm

CT-Scott wrote:
Thu Apr 02, 2020 7:54 am
tomfoolery, thanks for contributing to this thread. I'll have to mull over more some of what you discussed, but I'm curious about your initial idea (buying a house)...curious why you would prefer to buy the house outright, versus getting a mortgage at the current low rates.

Edit: To clarify...I know that a lot of people get satisfaction from paying off their mortgage. I could see doing that if I had already "won" and felt good about all of my other savings (in taxable and non-taxable accounts), had no other debt, and felt good about being able to draw from my savings to sustain my living expenses. So, I guess it would be the last thing I'd do. Maybe that describes you. I'm just curious as to your personal perspective on that.
I bought my one and only (present house) April 30, 1982 for $30,000. I had saved $15,000 and my father gifted me $15,000. No mortgage from the start. I had just turned 31.

My only other assets at that time were: $1,000 in an IRA, minimal other savings, a three year old Chevette. Probably my most valuable asset (maybe not, though, because I can't remember if comic books had yet made their dramatic increase in value) at that time aside that just purchased house were my 1,200 Marvel comic books. Prior to buying a house I'd frequently said that selling that comic book collection would provide me with the down payment on a house. But turned out I did not need to do so and they are all sitting on a shelf in my second bedroom.

I'm always the ultimate Security Seeking Personality. Never regretted my decision to have no mortgage.

However, in the late 80s I did have a frequent wild thought of doing a home equity loan to "invest" in baseball cards!

Vinny
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
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Re: Strategically taking a 401k loan and/or no-penalty withdrawal

Post by vnatale » Thu Apr 02, 2020 6:22 pm

CT-Scott wrote:
Thu Apr 02, 2020 8:28 am
tomfoolery wrote:
Thu Apr 02, 2020 2:14 am
On a side note, I don’t want more than $300k in my 401k total as I enter retirement age because the RMDs will be too large and I suspect social security will be means tested by the time I get to 65. So this is a way to reduce my 401k now. I’d rather have $100k more of home equity held in a trust than $100k more in my 401k which may make me ineligible for social security in 25 years.
This is interesting. Can you provide more info as to your approximate age and how much you expect/hope to have in your taxable accounts by 65? (Edit: Also, why "65"? RMDs don't start until 72, right?)

I'm 48 and we've traditionally done a poor job of saving. We make good money, but spend too much. But we used to carry credit card balances, and a combination of spending a little less and making more allowed us to at least get to the point of spending within our means. Several years back we finally got to the point of maxing out our 401k contributions, contributing to Roth IRAs (backdoor), maxing out an HSA, and building up a decent emergency fund (enough to cover several months, not years). But other than some Apple stock we bought about 10 years ago (and recently sold - with the intent of using towards a new house or paying off part/all of my daughter's college loans), we hadn't yet gotten to the point of dedicating extra dollars towards investments in taxable accounts.

With the corona-market in full effect, I'm not anxious to do that right now, but hope to start once we're settled in the new house (if not sooner). But the point of my rambling is to go back to the part of your post that I quoted...were we possibly "doing it wrong" by maxing out our 401k accounts and instead should we consider transitioning to reducing our 401k contributions (contribute only up to what our employers will match/max out at) and instead diverting some of those funds to taxable investment accounts? Up to now, I've figured that because we each make a decent amount (approx $200K/year each) having those 401k contributions reduce our AGI made the most sense. FWIW, you specifically mentioned not wanting more than $300K in your 401k. I'm currently at around $400K in my 401k (I'm 48) and my wife (54) is at around $450K.
Through last year the age was 70 1/2 for Required Minimum Distributions You had to start taking them six months after you hit 70 1/2. But then the recently passed SECURE Act of last year extended it two years for everyone to 72 years old, starting with this year. At least that is the way I am remembering it all.

Vinny

Vinny
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Re: Strategically taking a 401k loan and/or no-penalty withdrawal

Post by Kriegsspiel » Thu Apr 02, 2020 6:28 pm

Image
You there, Ephialtes. May you live forever.
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Re: Strategically taking a 401k loan and/or no-penalty withdrawal

Post by CT-Scott » Thu Apr 02, 2020 10:01 pm

If there isn't already a "Comic Books" thread on this forum, we need to start one soon. I'm 48 and all of my comic books were ones that I bought (some of which were older), but I still have them, have carried them around from one house the next, and I'd be interested in knowing how best to sell most of them for maximum profit. Of course, during a Recession/Depression certainly won't be that time, so it looks like I'll be bringing them along to my next house, too. Those, and my Commodore Amiga.
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Re: Strategically taking a 401k loan and/or no-penalty withdrawal

Post by vnatale » Thu Apr 02, 2020 11:07 pm

CT-Scott wrote:
Thu Apr 02, 2020 10:01 pm
If there isn't already a "Comic Books" thread on this forum, we need to start one soon. I'm 48 and all of my comic books were ones that I bought (some of which were older), but I still have them, have carried them around from one house the next, and I'd be interested in knowing how best to sell most of them for maximum profit. Of course, during a Recession/Depression certainly won't be that time, so it looks like I'll be bringing them along to my next house, too. Those, and my Commodore Amiga.
I bought all of my comic books out of the love for them, through the ages of about 11 through 18 or 19.

Once a month I'd buy all the issues and that night would read every single title. Then over the next week reread them all only this time stopping to reading all the reader letters prior to rereading the next one.

I stopped buying them when I missed a few issues and that just wrecked the whole thing with the way Marvel comics continued from one issue to another, sometimes having stories going on in an X-Men issue and some other title at the same time.

They stayed at my parents house until I bought my house. Luckily my mother never threw out what she referred to as my "funny books"!

The absolute best way to sell them is one-by-one through eBay. eBay represents the absolute best price guide there is since It does represent actual true sales, not what some price guide says something is worth.

You can actually develop your own personal price guide by, for a period of time, going through eBay completed sales for an issue and seeing for what it sold.

Of course, as is just for baseball card, it is condition, condition, condition that ultimately decide the value of a comic book (along with its desirability, of course)! For a given desirability, the better the condition the higher the price.

And, after I stopped "investing" in baseball cards, this whole "grading" thing came in. You send your card away and, for a charge, it gets slabbed and a professional grader gives it a grade (according to condition). You, of course, want the highest grade as possible. I never "invested" in comic books like I "invested" in baseball cards. But it seems like the same process has happened with comic books. You send it away to have it sealed and then come back to you with a grade.

I will close with my all-time comic books story.

I had a 7th grade classmate who was a big time Marvel comic book reader such as myself. And, he missed buying the #26 (I clearly remember the issue number 57 years later!) issue of Fantastic Four which was part 2 of "The Thing fighting The Hulk". He really wanted to read that second part. He offered to pay me $5 for my copy. It had cost me just 12 cents the prior month! $5 represented a lot of months worth of comic book buying for me. It was a tremendous sum of money for me back then. I never even remember holding a $5 bill in my hands back then. I felt badly taking that sum of money from him. I offered to let him borrow it to read it and then return it. He said, "No!". He would only buy it. I needed a few days to think about it because even then I was a buyer and not a seller. In the end I decided to sell it to him. That $5 offer was just too overwhelming to turn down! I now see that I can get another copy of that issue on eBay for only for $5,995! Or, only $288 a month for 24 months! I wonder if he still has his copy! Is he even still alive? Does that comic book still live somewhere? Or, did his mother, somewhere along the line throw it out??!?
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Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
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Re: Strategically taking a 401k loan and/or no-penalty withdrawal

Post by Kriegsspiel » Thu Apr 02, 2020 11:16 pm

It's fun to look back, on your younger years, and realize you destroyed $37,000 worth of Beanie Babies by blowing them apart with fireworks.
You there, Ephialtes. May you live forever.
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Re: Strategically taking a 401k loan and/or no-penalty withdrawal

Post by vnatale » Thu Apr 02, 2020 11:30 pm

Kriegsspiel wrote:
Thu Apr 02, 2020 11:16 pm
It's fun to look back, on your younger years, and realize you destroyed $37,000 worth of Beanie Babies by blowing them apart with fireworks.

Is THAT a true, personal story??!!!

I can throw in that I got into my first car accident at 12 years old with me at the wheel (somewhat)!

Vinny
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Re: Strategically taking a 401k loan and/or no-penalty withdrawal

Post by Kriegsspiel » Thu Apr 02, 2020 11:33 pm

I've obviously forgiven my parents for beating me with implements. That's a lot of money.
You there, Ephialtes. May you live forever.
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