Purchasing first home - withdraw from 403(b) advised?

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Myopic squirrel
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Purchasing first home - withdraw from 403(b) advised?

Post by Myopic squirrel » Fri Jul 10, 2015 3:50 pm

Our 31 year old son is planning the purchase of his first home (a duplex), and is considering using the $10K maximum penalty-free withdrawal from his 403(b) funds (currently at $33K) as a partial down-payment. He receives 5% employer matching (I don't know the annual maximum). His rationale: his employer's matching slightly mitigates the loss of funds. Is this advisable? Thank you in advance.

sharpjm
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Re: Purchasing first home - withdraw from 403(b) advised?

Post by sharpjm » Fri Jul 10, 2015 4:09 pm

You cannot withdraw money from a 403(b) for a home without incurring a 10% penalty (plus tax) on the funds.

You may be able to take a 403(b) loan, in which case, you can typically only get a loan from your contributions (not your employers) and I don't think there is a $10k maximum on the loan.

You may be confusing the $10k withdrawal with what you can do in an IRA. 403(b)s are different.

I think most would suggest not making withdrawals or taking loans on retirement accounts.

NightFall
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Re: Purchasing first home - withdraw from 403(b) advised?

Post by NightFall » Fri Jul 10, 2015 4:16 pm

No. Tax advantaged space is precious and can't always be made up later. Even if the loan gets repaid, he's lost any gains that money would have had (and the gains on those gains) for the lifetime of the account. The rationale that the 5% employer match makes up for taking money out isn't very good. This is the employer contribution for retirement. Without it, the account is just an IRA with higher limits. Just because you can withdraw money penalty free doesn't mean you should.

With that said, we don't know much about his financial situation so my advice is just applicable to many situations and maybe not his.

sawhorse
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Re: Purchasing first home - withdraw from 403(b) advised?

Post by sawhorse » Fri Jul 10, 2015 5:22 pm

I think he's confusing 403bs with IRAs. It's IRAs that allow a penalty free withdrawal up to $10000 for the purchase of a new home.

Topic Author
Myopic squirrel
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Re: Purchasing first home - withdraw from 403(b) advised?

Post by Myopic squirrel » Fri Jul 10, 2015 5:57 pm

Folks - thank you for your prompt replies. I ASS/U/ME- ed that the 10K penalty free WD applied to both the 403(b) and the IRA. Thank you for the clarification!

sawhorse
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Re: Purchasing first home - withdraw from 403(b) advised?

Post by sawhorse » Fri Jul 10, 2015 6:29 pm

Myopic squirrel wrote:Folks - thank you for your prompt replies. I ASS/U/ME- ed that the 10K penalty free WD applied to both the 403(b) and the IRA. Thank you for the clarification!
Retirement plans are really complicated. It's no wonder you're confused!

Does he have an IRA? If not, I highly recommend setting one up, not so he can withdraw from it (it would take 2 years of contributions to get to $10000 anyway) but because it's a good idea.

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XtremeSki2001
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Re: Purchasing first home - withdraw from 403(b) advised?

Post by XtremeSki2001 » Sat Jul 11, 2015 5:15 am

IMHO, if he hasn't saved enough for a 20% down-payment on a home as well as an emergency fund, he's not ready to buy a house.
A box of rain will ease the pain and love will see you through

JinroSoju
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Re: Purchasing first home - withdraw from 403(b) advised?

Post by JinroSoju » Sat Jul 11, 2015 8:52 am

My information may be dated, but my 403b plan allows home loans.

It is my understanding that the IRS does allow loans to 403b plan participants, but not every 403b plan allows them; your son would have to check with his plan administrator. I can borrow up to 50% of my vested account balance (or a max of $50,000).

Your son will be given a repayment plan, all interest on the loan paid goes back into his account. If he fails to pay, the remaining loan balance will be subject to taxable income and an additional 10% early withdrawal penalty (ouch). If your son leaves his job, I believe he will be required to pay the loan in full immediately (double ouch).

kjvmartin
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Re: Purchasing first home - withdraw from 403(b) advised?

Post by kjvmartin » Sat Jul 11, 2015 9:09 am

I just did this...

This is something that requires some big picture thinking. A short term 401k loan isn't the worst thing he could do as long as the situation really indicates it's time to buy a house, it will eliminate the PMI, and the payment is well within his budget.

I was uneducated and treated my 401k like an ATM for a few years (common at my workplace) - we are allowed up to 5 loans at once up to half our total balance. I've seen it used for everything from golf clubs to cruises to kids braces. I finally repaid all of mine, paid off all other debt, cars and student loans, and then I contributed as much as possible with the specific plan to use it for a house downpayment.

I had around $50k, now I have $25k. I know how much my missing 25k should be worth in 30 years, so I will be replacing it in full within 1-3 years. I also know how much I saved in PMI and how much I'll save in 4.125% interest over 30 years of my mortgage. Was it a perfect situation? No. My alternative was to rent a house for $1300 a month vs. buying one for $1000 a month, deduct the interest, taxes, etc. Maybe it will even appreciate.

Mike

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