i have an idea to how to draw from 401k interest free??

ggelitetrader000 said:
for x stock that likely to move in bullish, you buy Y number of stock in brokerage and short the same number of stock in 401k. Of course the net effect is zero, but if stock go bull, then you have effectively withdrawn from your 401k. If the stock goes down unexpectedly, well, that is sad but also no loss, you just contributed to your 401k.
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That's ... innovative, a "tax law" arbitrage of sorts. With regards to the critics pointing to the "wash sale" rules, and limitations on shorting in tax-deferred accounts, these can be circumvented by trading ETFs. For example, go long the bear ETF (such as SDS) in the 401K account, and go long the same dollar amount of the bull ETF (such as SSO) in a brokerage account. If the market goes up, you've effectively transferred money out of your 401K and avoided paying the early withdrawal penalty, which I think is a hefty 20% penalty.

The problem is, of course, that the effect could easily be the opposite of what you intended. If the market goes down in the example above, then you've contributed to your 401K, instead of withdrawing from it, which was the intent.

With regards to the legality of this scheme, I don't see any issues.
 
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nonlinear5 said:
That's ... innovative, a "tax law" arbitrage of sorts. With regards to the critics pointing to the "wash sale" rules, and limitations on shorting in tax-deferred accounts, these can be circumvented by trading ETFs. For example, go long the bear ETF (such as SDS) in the 401K account, and go long the same dollar amount of the bull ETF (such as SSO) in a brokerage account. If the market goes up, you've effectively transferred money out of your 401K and avoided paying the early withdrawal penalty, which I think is a hefty 20% penalty.

The problem is, of course, that the effect could easily be the opposite of what you intended. If the market goes down in the example above, then you've contributed to your 401K, instead of withdrawing from it, which was the intent.

With regards to the legality of this scheme, I don't see any issues.
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Or the market goes sideways and you lose on both sides due to the decay. usually "financial engineering" such this "401k withdrawal"' idea are a waste of time at best or blow up at worse.
 
ggelitetrader000 said:
Well there are hundreds or thousands of articles on the internet on how earl withdrawal from 401k can cost you$$ due to penalties and taxes which I did not dispute. Now I have been mostly trading stocks in my 401k (as they dont allow options) and mostly traded options in my private brokerage.

So basically here is incredible simple idea that withdraw fund from 401k this morning, any opinion will be appreciated? :
for x stock that likely to move in bullish, you buy Y number of stock in brokerage and short the same number of stock in 401k. Of course the net effect is zero, but if stock go bull, then you have effectively withdrawn from your 401k. If the stock goes down unexpectedly, well, that is sad but also no loss, you just contributed to your 401k.
More...
Great thinking actually.

But as stevegee58 said, it is considered by the USG IRS as a wash sale unless you take a further step: dis-similar trades, e.g. on one side is stock and on the other side perhaps options or another instrument.

Best wishes.
 
When you withdraw money from a qualified plan your trustee will generate a 1099 R. The amount will be taxable and subject to additional penalty of 10% if you are under 59 1/2. Selling options or shorting stock(in the rare case where it is allowed) does not eliminate the tax obligation. You can redeposit the money with 60 days and avoid the tax issue in most instances, but you can also be creating a reporting nightmare - especially if the two transactions occur in two different reporting years.
You are going to have a much bigger problem with the IRS than you can imagine.

Talk to you 401(K) trustee and find out what strategies they allow.
Many do allow stock and option trading. I haven't ever heard of one that allowed shorting without a ton of approvals that may not currently be in place.

From ROTHIRA.com "There is another option, however. If you want to use some of the money you have saved for retirement temporarily, you can take advantage of the 60-day rollover role to give yourself a loan. But you have to follow the rules precisely and put the money back into a tax-deferred retirement plan—an IRA or 401(k)—within 60 days."
 
ggelitetrader000 said:
Well there are hundreds or thousands of articles on the internet on how earl withdrawal from 401k can cost you$$ due to penalties and taxes which I did not dispute. Now I have been mostly trading stocks in my 401k (as they dont allow options) and mostly traded options in my private brokerage.

So basically here is incredible simple idea that withdraw fund from 401k this morning, any opinion will be appreciated? :
for x stock that likely to move in bullish, you buy Y number of stock in brokerage and short the same number of stock in 401k. Of course the net effect is zero, but if stock go bull, then you have effectively withdrawn from your 401k. If the stock goes down unexpectedly, well, that is sad but also no loss, you just contributed to your 401k.
More...
I do have a couple of thoughts for you to consider:

1. If your 401K does not allow options, roll part of it into an IRA. Most brokerages allow option trading up to bullish spreads level, i.e., no naked shorts or credit spreads.

2. On one side you can trade stock, the other side perhaps options. I think they are dissimilar enough it should satisfy the IRS wash sale rule. I am going to research it more to make sure it does.

Thank you for your OP. It is really very helpful to me.

Regards,
 
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