[Severin]

I’ve built up some FU money, but not enough liquidity for a comfortable runway for a job change I’m considering (from W2 to 1099 with a ramp-up comp plan). I do have access to a sizeable HELOC as a backup option, but I’m calculating all options.

I intended to turn off my 401k contribution to build capital for the next few months. However, I get 3.5% match to my 6% so a net 58% free money from my employer. I’m fully vested. Wouldn’t it be smarter to continue contributions to the match, if I decide to tap a little of that money and pay the 10% penalty, and be ahead net 48% on the money (ignore market volatility, and standard income taxable event impacts for this hypothetical)?

What am I missing?

[Angela]

Not what you asked, but before you make the leap, make sure you have a plan for health insurance.

[Ryan]

Your access to the HELOC may evaporate if you change jobs.

[Jason]

Depends on your plan, current progress, future goals/needs, etc.

I agree, makes sense to simply earn the match. You could take a withdrawal during a year with very low income and potentially only pay the 10% penalty (if you’re under the 0% tax bracket).

Living off savings during that year and retaining revenue in your business (no business distributions) would help.

Also, the 401k would have to be rolled to IRA because 401k distributions require a 20% withholding to federal tax.

Don’t miss: 401k– How do I protect it?

[Mark]

Why would you consider borrowing money from yourself at 10% I interest.

[Josh]

You can take a loan from your 401k and pay yourself back the interest. You can take upto $50k or 50% of value whichever is lower.

Just make sure the loan doesn’t become due upon leaving employment

[Author]

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