401k withdrawal for buying a home

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Eurookat
Posts: 264
Joined: Sat Nov 29, 2014 1:44 pm

401k withdrawal for buying a home

Post by Eurookat » Tue Jul 09, 2019 11:58 am

Some information ...

- Buying a house and selling our current house
- Have $40k in 401k from previous job

I haven't fully research just yet but someone mentioned to me I may be able to use my 401k towards downpayment for a house. I need to move the $40k out of my former employees account and into a rollover or my current employer's retirement account.

They will allow me to either cash out everything, roll everything or split between a rollover and cash out.

1) can I cash out some money to use towards downpayment and avoid paying taxes?
2) if #1 isn't allowed, what would the tax process look like? Would ADP furnish a check less the tax amount? I believe I have to report it but I wasn't sure if it would be taxed again come april when I go to report.

cshell2
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Re: 401k withdrawal for buying a home

Post by cshell2 » Tue Jul 09, 2019 12:34 pm

You can't cash it in for a house purchase and avoid taxes. You will owe your marginal rate, plus a 10% penalty for a withdrawal prior to age 59 1/2.

A 401K loan is a possibility with your current employer, but not the previous one. 401K loans are paid back with payroll deductions and the full loan amount comes due if your employment ends. Regardless, you couldn't get the full 40K. The max loan amount is 50% of the balance up to 50K.

I think your best bet is to find another way to fund your house purchase. Raiding the 401K is an expensive option.

bloom2708
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Re: 401k withdrawal for buying a home

Post by bloom2708 » Tue Jul 09, 2019 12:37 pm

A 401k loan is best when you are still employed and you can repay the loan with your paycheck.

You would have to ask the 401k custodian how a 401k loan works when you are no longer employed by that company.

A withdrawal (not a loan) would nip you at your highest marginal tax bracket + a 10% penalty (if not over 59.5). Probably a 35 to 45% haircut if your state has income tax.

In general, if you have to take out a 401k loan to get a mortgage, you are not ready to buy a home.

Do you have any other money saved for the house down payment? Not including emergency funds and other short term spending? If not, rent and save up. 20% down (without financial gymnastics) will put you on firm financial ground.

Good luck!
"We are not here to agree with you; we are here to provoke thoughtfulness." Unknown Boglehead

cshell2
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Re: 401k withdrawal for buying a home

Post by cshell2 » Tue Jul 09, 2019 12:53 pm

My personal story about why to leave that money in place.

In 2002 when my first son was born, I quit work to stay home with him. I had 22K in a 401K and a 15K truck loan. I really, really wanted to cash it in and pay the taxes/penalties and be done with the loan. I figured there would have been right about 15K left after the taxes. Well, eventually I just decided to leave it be and rolled it into an IRA.

17 years later that truck is long gone. Probably a rusted out scrap pile by now. That IRA is worth 128K. And I've never added a dime to it since 2002. It's all growth. I plan on leaving that fund untouched until I retire in 15 years. I want to see how many years of retirement I cover on what I was going to trade for a truck. So far it's at 4 years. :happy

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Nate79
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Re: 401k withdrawal for buying a home

Post by Nate79 » Tue Jul 09, 2019 1:46 pm

This is a very bad idea. If you can't afford the down payment then you can't afford the house. No way would I cash out the 401k for a house down payment and 401k loans are IMO very bad ideas (which I don't think you are eligible anyways because it is not a current employer 401k).

mariezzz
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Re: 401k withdrawal for buying a home

Post by mariezzz » Tue Jul 09, 2019 1:59 pm

If you meet all the terms, you can rollover the 401k to an IRA, and then use IRA funds, up to $10,000, as (part of) your downpayment, if it's really necessary. It's pretty easy to research the basic details on your own. Be sure to understand all the restrictions, including time limits, and what constitutes a 'first time homebuyer'. You'll have to pay income tax on the withdrawal, but no penalty IF you meet all the terms.

https://www.nolo.com/legal-encyclopedia ... yment.html

If that allows you to avoid paying PMI, it may be a smart move. But don't buy more house than you need or can afford, and make an effort to build your retirement funds back up. Even better is simply saving money for the down payment. That avoids all the paperwork on your taxes, and risk of violating some rule and ending up having to pay the 10% penalty.

I'd avoid the 401k loan option - if your employer allows them, they typically only allow you to withdraw about 50% of the 401k value, and if your employment ends, the loan becomes due in full immediately.

cshell2
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Re: 401k withdrawal for buying a home

Post by cshell2 » Tue Jul 09, 2019 2:13 pm

mariezzz wrote:
Tue Jul 09, 2019 1:59 pm
If you meet all the terms, you can rollover the 401k to an IRA, and then use IRA funds, up to $10,000, as (part of) your downpayment, if it's really necessary. It's pretty easy to research the basic details on your own. Be sure to understand all the restrictions, including time limits, and what constitutes a 'first time homebuyer'. You'll have to pay income tax on the withdrawal, but no penalty IF you meet all the terms.

https://www.nolo.com/legal-encyclopedia ... yment.html

If that allows you to avoid paying PMI, it may be a smart move. But don't buy more house than you need or can afford, and make an effort to build your retirement funds back up. Even better is simply saving money for the down payment. That avoids all the paperwork on your taxes, and risk of violating some rule and ending up having to pay the 10% penalty.

I'd avoid the 401k loan option - if your employer allows them, they typically only allow you to withdraw about 50% of the 401k value, and if your employment ends, the loan becomes due in full immediately.
They're not first time homebuyers though. They're selling a current home to buy a new one.

gpburdell
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Re: 401k withdrawal for buying a home

Post by gpburdell » Tue Jul 09, 2019 11:15 pm

mariezzz wrote:
Tue Jul 09, 2019 1:59 pm
I'd avoid the 401k loan option - if your employer allows them, they typically only allow you to withdraw about 50% of the 401k value, and if your employment ends, the loan becomes due in full immediately.
Whether a 401k loan becomes due in full upon leaving the company is up to each plan. I took out a 401k loan last year so that I didn't have to sell my old house first and could move on my own schedule etc. I was thinking about leaving the company (which I eventually did) so I looked into this beforehand and the 401k plan doesn't require loans to be paid off early when I left company.

mariezzz
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Re: 401k withdrawal for buying a home

Post by mariezzz » Tue Jul 09, 2019 11:23 pm

gpburdell wrote:
Tue Jul 09, 2019 11:15 pm
mariezzz wrote:
Tue Jul 09, 2019 1:59 pm
I'd avoid the 401k loan option - if your employer allows them, they typically only allow you to withdraw about 50% of the 401k value, and if your employment ends, the loan becomes due in full immediately.
Whether a 401k loan becomes due in full upon leaving the company is up to each plan. I took out a 401k loan last year so that I didn't have to sell my old house first and could move on my own schedule etc. I was thinking about leaving the company (which I eventually did) so I looked into this beforehand and the 401k plan doesn't require loans to be paid off early when I left company.
Looks like the laws have changed a bit, but there are still deadlines, just longer:
https://www.creditkarma.com/tax/i/401k- ... oan-repay/
The Tax Cuts and Jobs Act significantly extended the window to repay or roll over an outstanding balance on a 401(k) loan when a borrower leaves an employer. Effective for tax years beginning in 2018, the deadline is now the due date of the employee’s tax return for the year in which the distribution occurs, including extensions.

This means if you leave your job during 2018, you would have until April 15, 2019, to repay, or Oct. 15, 2019, if you get an extension.

gpburdell
Posts: 174
Joined: Sun Jun 17, 2012 9:01 pm

Re: 401k withdrawal for buying a home

Post by gpburdell » Wed Jul 10, 2019 8:09 pm

mariezzz wrote:
Tue Jul 09, 2019 11:23 pm


Looks like the laws have changed a bit, but there are still deadlines, just longer:
https://www.creditkarma.com/tax/i/401k- ... oan-repay/
The Tax Cuts and Jobs Act significantly extended the window to repay or roll over an outstanding balance on a 401(k) loan when a borrower leaves an employer. Effective for tax years beginning in 2018, the deadline is now the due date of the employee’s tax return for the year in which the distribution occurs, including extensions.

This means if you leave your job during 2018, you would have until April 15, 2019, to repay, or Oct. 15, 2019, if you get an extension.
This would only apply if a company's plan forced you to payback soon after leaving the company. I took my 401k loan back in Feb 2018 and left the company in Nov 2018. The loan is for 10 years and my payments will end in 2028 unless I decide to pay it off early which I'll do in a couple years. My old company's 401k plan specifically says it does not force early repayment upon leaving the company and I vereifed this with the administrator before leaving. The only thing I'm prohibited from doing is taking any distributions/rollover till the loan is paid in full.

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