Is it better to borrow from 401(k) or withdraw from ROTH for a downpayment?

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pghpens
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Is it better to borrow from 401(k) or withdraw from ROTH for a downpayment?

Post by pghpens » Sat Apr 20, 2019 10:43 am

Hi everyone.

I'm 27 years old and will be buying a house in the near future. I've focused most of my savings in my early working career on maxing out my ROTH and funding my 401(k) as much as I can and therefore, have about $75K between the accounts. However, i don't have as much in liquid cash to fund a downpayment. I'd expect to need about $40K for a 20% downpayment and have $13K in cash right now so would need to come up with $27K to avoid PMI.

So I have 3 options:

1. Take loan from 401(k)
2. Withdraw from ROTH
3. Just put down the cash I have and pay PMI and maybe reduce 401(k) and ROTH contributions until I hit 20%.

I'm leaning towards using the 401(k) loan because I have a fairly stable job I plan to work at for a while and eventually as I pay it back, I get the 401(k) back to where it was while still continuing to put regular contributions in each paycheck. However, with the ROTH, I can never put the money back in for that year so I lose it.

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MNGopher
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Re: Is it better to borrow from 401(k) or withdraw from ROTH for a downpayment?

Post by MNGopher » Sat Apr 20, 2019 10:55 am

You're off to a good start for your age, but I would never borrow from a retirement account. So 3, or 4. Wait until you have the 20% cash to put down before purchasing the house.

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pghpens
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Re: Is it better to borrow from 401(k) or withdraw from ROTH for a downpayment?

Post by pghpens » Sat Apr 20, 2019 10:56 am

Thank you. Assuming #4, would you reduce retirement contributions to get to 20%? Right now, I'm not saving a whole lot of liquid cash because most of my savings go towards the 401(k) and ROTH. Not much leftover after that.

mhalley
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Re: Is it better to borrow from 401(k) or withdraw from ROTH for a downpayment?

Post by mhalley » Sat Apr 20, 2019 11:00 am

I don’t think you are ready to buy a house yet. In addition to the down payment, you need to have your regular emergency fund, as well as some cushion for unexpected expenses after you move in. I agree that raiding retirement accounts is a bad idea. I would cut back on the retirement account savings some to build up the down payment plus some cushion.

Lee_WSP
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Re: Is it better to borrow from 401(k) or withdraw from ROTH for a downpayment?

Post by Lee_WSP » Sat Apr 20, 2019 11:30 am

I would advise waiting and saving.

lakpr
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Re: Is it better to borrow from 401(k) or withdraw from ROTH for a downpayment?

Post by lakpr » Sat Apr 20, 2019 11:31 am

+1 to mhalley. I would postpone house buying until you have $40k for 20% down payment + $10k emergency fund on hand. Continue to rent till then

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MNGopher
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Re: Is it better to borrow from 401(k) or withdraw from ROTH for a downpayment?

Post by MNGopher » Sat Apr 20, 2019 11:32 am

pghpens wrote:
Sat Apr 20, 2019 10:56 am
Thank you. Assuming #4, would you reduce retirement contributions to get to 20%? Right now, I'm not saving a whole lot of liquid cash because most of my savings go towards the 401(k) and ROTH. Not much leftover after that.
Correct. IMO reducing contributions for a couple years is a much better idea then taking funds out.

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celia
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Re: Is it better to borrow from 401(k) or withdraw from ROTH for a downpayment?

Post by celia » Sat Apr 20, 2019 11:38 am

Postpone buying a house until you have both an ER and down payment. Houses are money pits. You will want to fix this and that. Buy an appliance. Get a new curtains. Etc. Meanwhile you could get sick and not be able to work for a month. The mortgage (and property taxes and homeowner's insurance) would still have to be paid, so you would dig into the Emergency Fund.

That's how life seems to go. If not this year, then next year.

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Stinky
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Re: Is it better to borrow from 401(k) or withdraw from ROTH for a downpayment?

Post by Stinky » Sat Apr 20, 2019 12:11 pm

lakpr wrote:
Sat Apr 20, 2019 11:31 am
+1 to mhalley. I would postpone house buying until you have $40k for 20% down payment + $10k emergency fund on hand. Continue to rent till then
+1 on this.
It's a GREAT day to be alive - Travis Tritt

260chrisb
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Re: Is it better to borrow from 401(k) or withdraw from ROTH for a downpayment?

Post by 260chrisb » Sat Apr 20, 2019 12:14 pm

As you're seeing there is pretty much a consensus. My vote: none of the above! At 27 you have 75K more than I had at that age (probably more than most here I'm guessing) and are off to a great start! Never borrow from a retirement account unless its the absolute final option to avoid a bankruptcy or a serious emergency. This is neither of the two. Take your time, save an emergency fund, have money set aside for expenses outside of the emergency fund for the house (they will be expenses!), and save enough cash to make a 20% down payment to avoid PMI. All in good time.

EnjoyIt
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Re: Is it better to borrow from 401(k) or withdraw from ROTH for a downpayment?

Post by EnjoyIt » Sat Apr 20, 2019 12:32 pm

Stop saving in a Roth and save in a taxable account for your house. Buy when you have 20% plus $10k for incidentals.

I know this is a question not asked, but unless you are married and having kids I would not buy a house at that age. Owning a house kills your flexibility and adds unwanted headaches that you never have when you rent. Keep doing what you are doing, and when you are ready to settle down start finding a home with your spouse.

Remember, a house that you live in is not an investment. It is an expense and an anchor.

lakpr
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Re: Is it better to borrow from 401(k) or withdraw from ROTH for a downpayment?

Post by lakpr » Sat Apr 20, 2019 12:38 pm

EnjoyIt wrote:
Sat Apr 20, 2019 12:32 pm
Stop saving in a Roth and save in a taxable account for your house. Buy when you have 20% plus $10k for incidentals.
No issues with the rest of the message, but strongly disagree with the advice to stop saving in a Roth. The Roth space, once given up, cannot be ever reclaimed back. The Roth space should be maximized every year, never to be withdrawn from unless in a dire emergency, and Roth account is definitely not a House Down Payment fund. Just because tax laws allow you to withdraw for that purpose does not mean you should.

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pghpens
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Re: Is it better to borrow from 401(k) or withdraw from ROTH for a downpayment?

Post by pghpens » Sat Apr 20, 2019 12:38 pm

Thanks everyone- I do already have an E fund of $15K in ally cash so I feel pretty good in that regard. Probably could reduce the E-Fund honestly, but I like having that reserve since I live on $2K per month. And I am getting married next year, but my fiancee and myself we would just split the down payment 50-50 and one of us would move in until after marriage. Then the other would move in. So I do feel like I'm at a point in life where it makes sense to settle down and buy a house, but I am kind of holding up the process as I don't have 50% of the downpayment unless I borrow from retirement or delay the purchase.

EnjoyIt
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Re: Is it better to borrow from 401(k) or withdraw from ROTH for a downpayment?

Post by EnjoyIt » Sat Apr 20, 2019 12:54 pm

pghpens wrote:
Sat Apr 20, 2019 12:38 pm
Thanks everyone- I do already have an E fund of $15K in ally cash so I feel pretty good in that regard. Probably could reduce the E-Fund honestly, but I like having that reserve since I live on $2K per month. And I am getting married next year, but my fiancee and myself we would just split the down payment 50-50 and one of us would move in until after marriage. Then the other would move in. So I do feel like I'm at a point in life where it makes sense to settle down and buy a house, but I am kind of holding up the process as I don't have 50% of the downpayment unless I borrow from retirement or delay the purchase.
I see. You are in a tough position. Since you were able to save $15k emergency fund, that also means you are able to save outside your retirement account. Ideally waiting until you have the cash is optimal. I would never pull money from a Roth to fund anything unless it was a dire emergency. Paying PMI is the next best thing but I hate it immensely as I will describe in this example which is similar to your plan #3:

Looking to buy a $320k house putting $53k down and having a 0.75% PMI. You therefor borrowed $267k paying a PMI of $2002.50. If you had the extra $17k for down payment your PMI would be $0 which means you are paying $2002.50 to borrow an additional $17k which is an interest rate of 11.8% and demands immediate attention. Let's say a few years in and you were able to pay down your mortgage to $260K. Your PMI then would be $1950 on borrowing $10k or an effective interest rate of 19.5%

As you can see, I am not a fan of PMI unless you can get it out of the way very quickly. Within 12 to 18 months at most.

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Re: Is it better to borrow from 401(k) or withdraw from ROTH for a downpayment?

Post by pasadena » Sat Apr 20, 2019 1:27 pm

260chrisb wrote:
Sat Apr 20, 2019 12:14 pm
As you're seeing there is pretty much a consensus. My vote: none of the above! At 27 you have 75K more than I had at that age (probably more than most here I'm guessing) and are off to a great start! Never borrow from a retirement account unless its the absolute final option to avoid a bankruptcy or a serious emergency. This is neither of the two. Take your time, save an emergency fund, have money set aside for expenses outside of the emergency fund for the house (they will be expenses!), and save enough cash to make a 20% down payment to avoid PMI. All in good time.
+1. In addition to the downpayment and EF, you also need roughly 5% to pay for ancillary costs (closing costs, inspections, moving costs), and probably should have a bit more for initial furnishing, initial purchases of things you might need but haven't thought of because you've never needed them in a condo (lawn mower comes to mind).

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Wiggums
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Re: Is it better to borrow from 401(k) or withdraw from ROTH for a downpayment?

Post by Wiggums » Sat Apr 20, 2019 1:43 pm

mhalley wrote:
Sat Apr 20, 2019 11:00 am
I don’t think you are ready to buy a house yet. In addition to the down payment, you need to have your regular emergency fund, as well as some cushion for unexpected expenses after you move in. I agree that raiding retirement accounts is a bad idea. I would cut back on the retirement account savings some to build up the down payment plus some cushion.
+1

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