[Homestead] 401k question

Clansgian at wmconnect.com Clansgian at wmconnect.com
Sat Oct 25 00:09:20 EDT 2008



> >Why is it, if you have a 401K through your employer, that you have to 
> quit your job in order to cash out?  Why?
> 

The simple answer (non answer, really) is that federal law mandates it.

But the reason is because your employer doesn't actually have the money.  The 
money is theoretical, just like 'money' in the stock market.  When you work a 
job you have the option of keeping all your money and spending it as you 
choose, or buying 401K lottery tickets with part of it.

Just like of 50% of the people who had, say, ITT stock put in an order to 
sell that stock on Monday morning (cash it out, as it were), the other 50% of the 
people who own that stock would get nearly nothing.  Actually it would only 
take ore like 5% rather than 50%.  It's because the "money" in that stock 
doesn't really exist, even as money, which itself doesn't really exist in any real 
sense of the word.

So if an employer sponsors a 401K and suddenly half the employees decided to 
"cash out", there isn't any actual money to pay them.  All the "money" (nod, 
nudge, wink) is actually a hope that the stocks that make up the 401K will be 
doing well when you do cash out.

So limiting withdrawals and dissolutions to only employees who are leaving 
the company and the plan, the employer is not faced with the need for coming up 
with a large amount of cash (which it doesn't have) to pay off the 
contributors should a lot of them just want or need the money.

James


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