Roth 401k Withdrawl / Match Question - Home Down Payment

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dudeman135
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Roth 401k Withdrawl / Match Question - Home Down Payment

Post by dudeman135 » Sun Jan 15, 2017 9:48 am

I started a new job in Jan 2017 and it has a Roth 401k option. The employer match works out to 3.5% and you get the max matching as long as you contribute 6%. We are also in the process of building a new home and it is expected to be completed in 7 months. We have over 20% for the down payment, but we'd like to put every available amount we can down, minus an emergency fund of 3-6 months of expenses.

I know I could just wait to contribute until the house is complete to have the most $$ possible for down payment/closing, but I was wondering, could I contribute the 6% to the Roth 401k to get the full match and then withdraw what I've contributed between Jan-July, in July and still retain the match?

It would be approx $4000 that would be contributed between now and then.

After the home closing, we would be bumping the retirement savings back up to 15%. We follow the Dave Ramsey principles and we're debt free, minus the upcoming home purchase. Thanks ahead of time for your thoughts.

pascal
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Re: Roth 401k Withdrawl / Match Question - Home Down Payment

Post by pascal » Sun Jan 15, 2017 10:26 am

Yes, you can do that as long as your 401k provider does provide a rollover benefit that you can avail of in July.
If you have 20% already then there is no need to attempt what you are suggesting. I am reasonably sure - raiding a 401k when you don't have to would be something Dave Ramesey would not advocate.
"Never underestimate the ability of a bad situation to get worse...rapidly." Ninegrams

Ace$
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Re: Roth 401k Withdrawl / Match Question - Home Down Payment

Post by Ace$ » Sun Jan 15, 2017 10:37 am

pascal wrote:I am reasonably sure - raiding a 401k when you don't have to would be something Dave Ramesey would not advocate.


Agreed. Ramsey would not approve. Instead, he would suggest you just suspend contributions between now and when you close in order to hoard as much cash as possible and get back to the retirement/match post-closing.

IIWY, I'd just go with the 20%, keep retirement as is, and focus on paying off the mortgage (BS6) when you get there (which is probably immediately if you're already doing retirement investing).

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jimb_fromATL
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Re: Roth 401k Withdrawl / Match Question - Home Down Payment

Post by jimb_fromATL » Sun Jan 15, 2017 10:54 am

dudeman135 wrote:I started a new job in Jan 2017 and it has a Roth 401k option. The employer match works out to 3.5% and you get the max matching as long as you contribute 6%. We are also in the process of building a new home and it is expected to be completed in 7 months. We have over 20% for the down payment, but we'd like to put every available amount we can down, minus an emergency fund of 3-6 months of expenses.

I know I could just wait to contribute until the house is complete to have the most $$ possible for down payment/closing, but I was wondering, could I contribute the 6% to the Roth 401k to get the full match and then withdraw what I've contributed between Jan-July, in July and still retain the match?

It would be approx $4000 that would be contributed between now and then.

After the home closing, we would be bumping the retirement savings back up to 15%. We follow the Dave Ramsey principles and we're debt free, minus the upcoming home purchase. Thanks ahead of time for your thoughts.


It doesn't work that way. While you can withdraw contributions from a Roth IRA, you cannot withdraw it from a Roth 401(k).

    From IRS FAQS
      Since I make designated Roth contributions from after-tax income, can I make tax-free withdrawals from my designated Roth account at any time?

      No, the same restrictions on withdrawals that apply to pre-tax elective contributions also apply to designated Roth contributions. If your plan permits distributions from accounts because of hardship, you may choose to receive a hardship distribution from your designated Roth account. The hardship distribution will consist of a pro-rata share of earnings and basis and the earnings portion will be included in gross income unless you have had the designated Roth account for 5 years and are either disabled or over age 59 ½.

There would not be any advantage anyway that I can see even if you could . You pay your top tax bracket income tax for fed (and state) on the money you put into a Roth account or a taxable account. But even with a Roth IRA you can only withdraw the contributions ... not the earnings. So you'd be able to withdraw more money for the down payment if you just put the money earmarked for your down payment into a savings account or perhaps a money-market fund.

jimb

dudeman135
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Re: Roth 401k Withdrawl / Match Question - Home Down Payment

Post by dudeman135 » Sun Jan 15, 2017 11:26 am

jimb_fromATL wrote:It doesn't work that way. While you can withdraw contributions from a Roth IRA, you cannot withdraw it from a Roth 401(k).

    From IRS FAQS
      Since I make designated Roth contributions from after-tax income, can I make tax-free withdrawals from my designated Roth account at any time?

      No, the same restrictions on withdrawals that apply to pre-tax elective contributions also apply to designated Roth contributions. If your plan permits distributions from accounts because of hardship, you may choose to receive a hardship distribution from your designated Roth account. The hardship distribution will consist of a pro-rata share of earnings and basis and the earnings portion will be included in gross income unless you have had the designated Roth account for 5 years and are either disabled or over age 59 ½.

There would not be any advantage anyway that I can see even if you could . You pay your top tax bracket income tax for fed (and state) on the money you put into a Roth account or a taxable account. But even with a Roth IRA you can only withdraw the contributions ... not the earnings. So you'd be able to withdraw more money for the down payment if you just put the money earmarked for your down payment into a savings account or perhaps a money-market fund.

jimb


Ahh...that's what I needed to know. My thought was I could contribute roughly 4k between now and July, get a $2400 match and then withdraw my 4k contribution (or possibly a bit less depending on market fluctuations), retaining the $2400 match. Seemed too good to be true and I guess it was.

I understand now that isn't possible thanks to your post. So I have to decide if I want to contribute between now and July to get the match, or hold off for 7 months, to have more $ for the down payment and closing costs.

Thanks a bunch!

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jimb_fromATL
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Re: Roth 401k Withdrawl / Match Question - Home Down Payment

Post by jimb_fromATL » Sun Jan 15, 2017 12:05 pm

dudeman135 wrote: ... So I have to decide if I want to contribute between now and July to get the match, or hold off for 7 months, to have more $ for the down payment and closing costs.

Thanks a bunch!

Glad to help.

Here's something probably even more important to think about. You can look at the match as either a raise in pay, or an incredibly good guaranteed return on the investment in the year you make the contribution. So I can describe an experiment that might help you decide whether to contribute enough to get the match. It's pretty simple:

    Take the amount of the match for one paycheck in cash, drive out on the freeway, and throw it out the window.

    If that feels like it's a good contribution toward your future wealth and well being, then by all means skip the contributions and figuratively throw the rest of the matching payments out the window along with all the money it would have earned in compound interest over the rest of your life.

I do not know of any way that taking a voluntary cut in pay or losing a huge return on an investment and then losing the compound interest it would earn for the rest of your life can possibly be worth saving a few bucks in interest on the mortgage.

In fact, assuming normal returns in the market in your investments, and because of the exponential factor of TIME in earning compound interest in an investment or paying it on a debt, you stand to lose far more future wealth from reducing your 401(k) contributions than the extra down payment will save in interest on the house.

Here are links to some threads where I have posted examples describing how sometimes astoundingly much you can lose from your potential future retirement income by postponing or reducing retirement contributions in order to reduce relatively short term debts. And with any luck at all, even a mortgage is short-term compared to the rest of your life.

These do apply to you, because you'll still be losing taxes and time for compound interest in your retirement account in order to reduce the interest on a smaller and shorter debt.

viewtopic.php?f=1&t=180529 Pay down mortgage or stuff retirement accounts?
viewtopic.php?f=1&t=178566 Mortgage or 401k
viewtopic.php?f=2&t=136151&p=2011928#p2011928 Student Loans and Retirement help
viewtopic.php?t=136385 Paying student loans vs Losing compounding interest
viewtopic.php?f=2&t=128788 Swamped In Debt - Thoughts?
viewtopic.php?t=131027 Advice when to start investing considering Student Loan Debt
viewtopic.php?f=2&t=129906 Mortgage PMI or Student Loan?


jimb

Lafder
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Re: Roth 401k Withdrawl / Match Question - Home Down Payment

Post by Lafder » Sun Jan 15, 2017 12:59 pm

I would continue at least the 6% to get the max match, and NOT take any money out for the down payment.

A few 1000 more on down payment hardly makes a difference in your mortgage payments. But once you lose tax advantaged retirement space, you never get it back.

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DSInvestor
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Re: Roth 401k Withdrawl / Match Question - Home Down Payment

Post by DSInvestor » Sun Jan 15, 2017 1:50 pm

If you need cash flow now, why not make Traditional 401k contributions instead of Roth 401k to get the max match. Traditional 401k will give you more take home pay which you can use to apply to downpayment.

Alan S.
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Re: Roth 401k Withdrawl / Match Question - Home Down Payment

Post by Alan S. » Sun Jan 15, 2017 2:09 pm

Check whether your plan offers a "true up" match, and if so this could help you both save for your home down payment and still receive the max match by year end.

You could benefit from a year-end true up if you contributed below the maximum matching level for part of the year and above the maximum match percentages for the rest of the year. For example, your employer pays matching funds for up to 6 percent of your salary. You contribute 2 percent half of the year, and then 10 percent for the other six months. At the 2 percent level you did not max out the matching funds. A year-end true up would work it out so you end up getting the 6 percent.

You could use 3/9 or 4/8 as well as 2/10% deferrals to get there. Further, if you start with pre tax deferrals instead of Roth, your tax withholding will be reduced which saves more for your down payment.

If no true-up contributing less than 6% for any pay period will reduce your total match. Also, note that the match always goes into the traditional (pre tax) portion of the 401k, not to the Roth, even if you made Roth deferrals.

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Re: Roth 401k Withdrawl / Match Question - Home Down Payment

Post by aristotelian » Sun Jan 15, 2017 2:28 pm

If I understand correctly, you have 3-6 months of expenses in your cash emergency fund. Assuming you are gainfully employed in a stable profession, I would dip into your cash first, then replenish these funds as your top priority after the house is built.

You have enough to put down 20% and avoid PMI. Your mortgage is going to be at an affordable interest rate. You can always pay your mortgage off ahead of schedule with any surplus income in the future. I don't see the rush to pay it off now. Are you looking at a tight budget with the higher mortgage payment?

dudeman135
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Re: Roth 401k Withdrawl / Match Question - Home Down Payment

Post by dudeman135 » Sun Jan 15, 2017 4:13 pm

Ok ok ok...you win. :D But seriously, thanks for all the responses. You've convinced me to get 100% of the match and I'm going to go Traditional 401k vs Roth for the 6%, to leave a bit more in the take home.

And you are correct about the 3-6 months of expenses. With the new job comes increased stability for me and my wife's job is stable as well. So looking at things a bit closer, I can take 12k out of the emergency fund and still be at around 4 months of expenses. I tend to err on the side of being conservative in my calculations, so that was a factor as well.

The main reason for the desire to put as much down as possible was just to keep the payment at or under 1/4 of take home pay on a 15 year fixed. In reality, once we close on the house, the plan is to bump up both our 401Ks to at least the recommended 15% and focus on paying off the mortgage as quickly as possible.

So you are right, the extra 4k that I would "save" by not investing for 7 months, combined with the 2400 of match that I would be throwing away, does not make sense, especially given that we plan to pay the mortgage off within 5-10 years.

Now I just need to figure out which fund options to choose in the new 401k, which I will ask about in a separate thread. Thanks again!

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