Withdraw 401k for Down Payment

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jason1122
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Withdraw 401k for Down Payment

Post by jason1122 » Tue Oct 23, 2018 9:34 am

So let me start by saying I'm a total noob to this stuff. My spouce the big earner in our family and has a super-stable career. I've had several employers over the past decade and as a result have a three small 401ks: 30k, 14k and 13k. I'm no longer with any of those employers. We recently moved and need to put together a big down payment in a hot/seller's real estate market. Is there anything I can do to avoid the 10% fee? Thanks in advance for any advice.

grkmec
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Re: Withdraw 401k for Down Payment

Post by grkmec » Tue Oct 23, 2018 9:54 am

Why are you in such a rush to buy a house in a "hot/seller's real estate market" by raiding your 401k?

Jack FFR1846
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Re: Withdraw 401k for Down Payment

Post by Jack FFR1846 » Tue Oct 23, 2018 9:57 am

It's 10% plus the federal and state income taxes. Being conservative, expect you'll end up with half of what you take out. Not a good thing to do.
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jason1122
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Re: Withdraw 401k for Down Payment

Post by jason1122 » Tue Oct 23, 2018 10:05 am

grkmec wrote:
Tue Oct 23, 2018 9:54 am
Why are you in such a rush to buy a house in a "hot/seller's real estate market" by raiding your 401k?
Great question. We've been here almost two years and have been renting waiting for things to settle down - and they haven't settled down. The biggest reason is that my oldest starts kindergarten next fall! I'd really rather not have have to move again and separate him from friends again just cause I'm hanging on for a market to cool down.

jason1122
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Re: Withdraw 401k for Down Payment

Post by jason1122 » Tue Oct 23, 2018 10:06 am

Jack FFR1846 wrote:
Tue Oct 23, 2018 9:57 am
It's 10% plus the federal and state income taxes. Being conservative, expect you'll end up with half of what you take out. Not a good thing to do.
Ugh - so there's taxes on top of the 10% :(

Flyer24
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Re: Withdraw 401k for Down Payment

Post by Flyer24 » Tue Oct 23, 2018 10:30 am

jason1122 wrote:
Tue Oct 23, 2018 10:06 am
Jack FFR1846 wrote:
Tue Oct 23, 2018 9:57 am
It's 10% plus the federal and state income taxes. Being conservative, expect you'll end up with half of what you take out. Not a good thing to do.
Ugh - so there's taxes on top of the 10% :(
Any time you withdraw money out of your 401K, it is taxed.

Flyer24
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Re: Withdraw 401k for Down Payment

Post by Flyer24 » Tue Oct 23, 2018 10:35 am

A kid in kindergarten is still young enough to adjust to new friends. Don’t let that influence a major life decision. If they were in high school then that might be a different story.

jason1122
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Re: Withdraw 401k for Down Payment

Post by jason1122 » Tue Oct 23, 2018 10:40 am

Flyer24 wrote:
Tue Oct 23, 2018 10:35 am
A kid in kindergarten is still young enough to adjust to new friends. Don’t let that influence a major life decision. If they were in high school then that might be a different story.

Thanks good advice

Thegame14
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Re: Withdraw 401k for Down Payment

Post by Thegame14 » Tue Oct 23, 2018 10:45 am

jason1122 wrote:
Tue Oct 23, 2018 10:06 am
Jack FFR1846 wrote:
Tue Oct 23, 2018 9:57 am
It's 10% plus the federal and state income taxes. Being conservative, expect you'll end up with half of what you take out. Not a good thing to do.
Ugh - so there's taxes on top of the 10% :(
of course, you put your money in PRE TAX< so you didn't pay taxes on the money, therefore if you withdraw early you pay early withdraw penalty 10%, PLUS taxes that you never paid on the money.....

In general taking a 401K withdrawal is one of the worst financial decisions you could make, other than I guess divorce or not having insurance....unless it is literally life and death, you don't touch money in an IRA or 401K until you retire.

texasdiver
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Re: Withdraw 401k for Down Payment

Post by texasdiver » Tue Oct 23, 2018 6:19 pm

A 401k loan would make much more sense financially if your plan allows it. You don't pay any penalties and the interest on the loan you pay back to yourself.

rgs92
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Re: Withdraw 401k for Down Payment

Post by rgs92 » Tue Oct 23, 2018 6:35 pm

How would you feel if you took the money out of your 401K (at 65 cents on the dollar going to you, the remainder in taxes/penalties) and then the house you bought in a toppy real estate market lost value?

And houses are doing just that in this rising mortgage rate environment.

That sure would hurt I assume, adding insult to injury.

I would only consider this if you somehow got a super-grand bargain on a house.

runner540
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Re: Withdraw 401k for Down Payment

Post by runner540 » Tue Oct 23, 2018 6:51 pm

jason1122 wrote:
Tue Oct 23, 2018 9:34 am
So let me start by saying I'm a total noob to this stuff. My spouce the big earner in our family and has a super-stable career. I've had several employers over the past decade and as a result have a three small 401ks: 30k, 14k and 13k. I'm no longer with any of those employers. We recently moved and need to put together a big down payment in a hot/seller's real estate market. Is there anything I can do to avoid the 10% fee? Thanks in advance for any advice.
As others have said, do NOT pull money out of 401k for a house downpayment. If spouse is a big earner and stable career, why can't you save up a down payment? Also, this may shock some people, but you don't have to present your deed to a house to enroll a kid in school. If you know your preferred district, then rent there until you're ready to buy.

lassevirensghost
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Re: Withdraw 401k for Down Payment

Post by lassevirensghost » Tue Oct 23, 2018 7:54 pm

You can take $10k from an IRA penalty free for a down payment if it is your first home purchase.
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celia
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Re: Withdraw 401k for Down Payment

Post by celia » Tue Oct 23, 2018 8:04 pm

Where are you putting the money that you are saving for the down payment? How much do you currently have in relationship to the house price? 10%? 15%? 20%?
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

Flyer24
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Re: Withdraw 401k for Down Payment

Post by Flyer24 » Wed Oct 24, 2018 12:06 am

texasdiver wrote:
Tue Oct 23, 2018 6:19 pm
A 401k loan would make much more sense financially if your plan allows it. You don't pay any penalties and the interest on the loan you pay back to yourself.
Not if he is no longer with the employer.

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JoMoney
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Re: Withdraw 401k for Down Payment

Post by JoMoney » Wed Oct 24, 2018 12:35 am

jason1122 wrote:
Tue Oct 23, 2018 10:06 am
Jack FFR1846 wrote:
Tue Oct 23, 2018 9:57 am
It's 10% plus the federal and state income taxes. Being conservative, expect you'll end up with half of what you take out. Not a good thing to do.
Ugh - so there's taxes on top of the 10% :(
What state are you in? Not only is there a 10% Federal early withdrawal penalty, California has it's own 2.5% penalty .. (and this is on top of the regular income taxes you'll be paying - both federal and state - at the top end of your current tax bracket).

There is an exception on the penalty for up to $10,000 towards a home purchase, but you still owe the regular income taxes.
https://www.investopedia.com/ask/answer ... -house.asp

If you've got more than 5 years to wait, theoretically you could get around the penalty by rolling the money into a Roth IRA (you would have to pay taxes on it though). After 5 years the rollover amounts can be withdrawn without penalty... but if you take any of the earnings on the money over that time there is a penalty + tax on the earnings.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

fujiters
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Re: Withdraw 401k for Down Payment

Post by fujiters » Wed Oct 24, 2018 2:48 am

Flyer24 wrote:
Wed Oct 24, 2018 12:06 am
texasdiver wrote:
Tue Oct 23, 2018 6:19 pm
A 401k loan would make much more sense financially if your plan allows it. You don't pay any penalties and the interest on the loan you pay back to yourself.
Not if he is no longer with the employer.
Perhaps the high earning spouse could look into a 401k loan from his/her plan?

In any case, I'd recommend renting in the desired school district until OP has enough saved for this not to be an issue.
“The purpose of the margin of safety is to render the forecast unnecessary.” -Benjamin Graham

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jadd806
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Re: Withdraw 401k for Down Payment

Post by jadd806 » Wed Oct 24, 2018 6:36 am

You simply can't afford the house right now. You're probably better off waiting anyway. The housing market has been buoyed by 30+ years of falling interest rates and the tide may be turning. Most people aren't smart enough to figure out the effect of the new tax changes on the deductions they used to justify buying a house, so that arguably won't be priced in until tax time next year. Lenders are slowly increasing their risk tolerance to try and keep the music going - I personally know people who are buying houses for 0% down and 6% interest. These people are 2 missed paychecks away from financial ruin yet in some areas of the country they seem to be all that is propping up the housing market. It's really not looking good for people who stretched themselves thin to buy in the past few months.

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djpeteski
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Re: Withdraw 401k for Down Payment

Post by djpeteski » Wed Oct 24, 2018 7:01 am

jason1122 wrote:
Tue Oct 23, 2018 9:34 am
.... result have a three small 401ks: 30k, 14k and 13k.
I can understand them not seeming like much but combined that is 57k, not a small amount of money. How excited would you be if you won 57K in a lottery? Roll them into one Rollover IRA.

The best way to come up with a down payment is to get on a written budget and cut spending while earning as much as possible. Car payments, frequent eating out, and other consumer debts hinder your ability to save money.

Nissanzx1
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Re: Withdraw 401k for Down Payment

Post by Nissanzx1 » Wed Oct 24, 2018 7:10 am

401K isn't a savings account and raiding one or 4 to come up with this is a mistake. You'll be loosing 40% plus of your money if you take it as a withdrawal. Only way I'd raid one is maybe to avoid a foreclosure- maybe.

You need to wait to buy anything until you tighten the budget and save. Rushing to something like this is a serious mistake and I think you can feel that in your heart but a few of us are saying it out loud (via keyboard).

Make the sacrifices now, so your future is brighter and more secure. Home ownership is for those with 20% down at minimum and 6 months of expenses saved in emergency fund. Almost every expert in personal finance agrees for good reason. Good luck and have patience, you'll get the house and likely at a better/cheaper time.

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oldcomputerguy
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Re: Withdraw 401k for Down Payment

Post by oldcomputerguy » Wed Oct 24, 2018 7:50 am

texasdiver wrote:
Tue Oct 23, 2018 6:19 pm
A 401k loan would make much more sense financially if your plan allows it. You don't pay any penalties and the interest on the loan you pay back to yourself.
I'll chime in here and say that this is what DW and I did twenty-one years ago. I don't recommend it generally, as it means time out of the market. But in our case, there were multiple factors that argued in favor: (1) we found Our Dream House after years of searching; (2) we needed to sell our existing home in order to get the cash for the down payment, but it needed repairs before it could be sold which could not be done while we lived there; (3) our neighborhood had grown and changed to the point where we no longer felt comfortable living there.

We had some savings and some EE bonds that were redeemable, but needed more to make the down payment. So we ended up taking a loan from my 401k to act as a "bridge" while we prepped and sold the old house. After moving, we did the needed repairs and upgrades to the old house (which took about six months) and put it on the market. Fortunately, it sold quickly, and the proceeds of the sale went straight into repayment of the 401k.

The upside was, doing this let us get into Our Dream House (which is still our home and is now paid off). The bad news is that we missed a decent run-up in the US stock market over those months (summer 1997 to spring 1998). You will have to decide whether it is worth the risk of missing out on returns to take a loan from your 401k. Myself, I have no regrets. But I can't decide for you.
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

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