This website is called elitetrader for a reason. Somewhere on this forum lurks an actual elite trader. No one has found him yet. In all seriousness, some people apparently come on here to vent and attempt project their personal failures onto others. Don't listen to trolls, keep thinking creatively.
What you're doing amounts to a wash sale in different accounts: https://www.irs.gov/irb/2008-03_IRB/ar08.html
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.
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.
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.
Except the IRS is concerned mainly about using a wash sale to move money in to a tax deferred account. The rule you cited covers that, by disallowing the tax loss in the taxable account. Moving it out doesn't really make any sense when you could just borrow against it.
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."
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,