I need approx 50K to purchase a house. I want to withdraw the money from my 401K and will be able to pay it back within a year. I went to my 401K site and it says there is "typically" a 10% early-withdrawal penalty and subject to taxes. I have a couple of questions:
1) If the money is for a home is it subject to the early-withdrawal penalty?
2) I understood that if you pay the money back within a year you would owe no taxes...is this true or does it have to be the year it was withdrawn?
You don't have to withdraw the money. You should look into barrowing against your 401 K as an asset. Keep in mind you will have to pay interest on it.
OK, that is an excellent suggestion but here my issue... I have excellent credit but need 20% down because I'm going with non-verified loan. If I have an outstanding loan I'm afraid that might affect my credit score and ultimately my interest rate.
To be clear...you are paying the interest to yourself:
"Many 401(k) plans let you take a loan against your balance, typically at an interest rate like 8.5%. However, when you pay the money back, you are the one who gets the interest. The interest you pay goes directly into your account. You are truly borrowing the money from yourself. The only cost of the loan is normally a minor processing fee of $50. "
wow, thanks...i'm still in the "thinking outloud" stage and this helps a ton!
I'm not an expert here, but if you get pre-approved (ie loan is ready to go contingent upon 20% down), and you borrow from your 401k for the downpayment, I don't think your credit would be hurt as it relates to the home loan.
If you will be able to pay it back in a year then couldn't you just wait a year, save the $50K, and avoid dipping into your 401K?
The first thing you should do is talk to the benefits admin at your company or talk to the company administering your 401k. They will know the answers to your questions. Ask about loans, early withdrawls, and borrowing against the money. Talk to an actual human and don't stop until you have answers that you understand for all your questions.
Some 401k plans allow you to take loans from the fund. These are usually not subject to interest and penalties but if you leave your job for any reason the loan is due immediately. Yeah, baby. You just lost your job and you have a $50,000 debt payable now. Have a nice day. If you can't take a loan you might be able to make a withdrawl under hardship rules, but you generally need to prove that there is no other way you can get the money.
Generally speaking, it's a really bad idea to borrow from your 401k. It's for retirement. The only reason I'd consider it is if I wasn't going to make it to retirement unless I did it (medical emergencies or getting kicked out into the street to die in the gutter).
I'd recommend against early withdrawal. Isn't it only effective against pregnancy, like, 60% of the time?
quote]random wrote:
To be clear...you are paying the interest to yourself:
"Many 401(k) plans let you take a loan against your balance, typically at an interest rate like 8.5%. However, when you pay the money back, you are the one who gets the interest. The interest you pay goes directly into your account. You are truly borrowing the money from yourself. The only cost of the loan is normally a minor processing fee of $50. "[/quote]
Bingo! Some plans my differ, but I believe the max you can borrow is $50K. The fee on my e2b's plan was $100. The interest rate was 8.5%.
Pennysaved gives good advice.
Many 401(k) plans have an option where you can take out a loan for 1% + the prime rate. Prime is 8.25% now so you have to pay yourself back at 9.25%. That isn't a big deal if you think you can pay yourself back.
But if you lose your job or quit before you pay yourself back, you might face issues of a penalty plus having a higher gross income when you taxes time come.
I'd opt not to take out a loan from my 401(k) if you can wait a year to do it without taping into your 401(k).
You want your money inside your 401(k) to grow tax deferred. If you take out money, you are losing money that could grow each year. Sure, your home value can increase to offset that but I don't look at a home purchase as an investment. I look at it as a place to live where you can control inflation for housing costs.
dunk those donuts wrote:
Pennysaved gives good advice.
Many 401(k) plans have an option where you can take out a loan for 1% + the prime rate. Prime is 8.25% now so you have to pay yourself back at 9.25%. That isn't a big deal if you think you can pay yourself back.
But if you lose your job or quit before you pay yourself back, you might face issues of a penalty plus having a higher gross income when you taxes time come.
I'd opt not to take out a loan from my 401(k) if you can wait a year to do it without taping into your 401(k).
You want your money inside your 401(k) to grow tax deferred. If you take out money, you are losing money that could grow each year. Sure, your home value can increase to offset that but I don't look at a home purchase as an investment. I look at it as a place to live where you can control inflation for housing costs.
Voice of reason award goes to you and Pennysaved. Whew! Glad someone here has their head on straight. DUDE, do what these two have said and save the money and THEN buy a house. The way the markets are now in most areas, you'll likely pay no more for the same house a year from now, and you might even pay less. NEVER take from your retirement savings unless it keeps you from going bankrupt or there's some sort of family emergency that ONLY that will solve. What a bitch it would be to be 67 and really ready to retire but you can't because you took money out of your 401k. If you have to rent for a year, do that. Retirement money is sacred.
One other note...The money you pay back your loan with is post taxed money.
Another reason to avoid taking a loan from your 401k is that you lose any growth potential on the funds you withdraw until you pay them back. Plus with the market having recently lost a fair amount of value you'd be taking money out at lower share prices and likely putting it back in at higher share prices which is backwards for long-term growth. That assumes your 401k is in stocks not more conservative savings options.
As it was explained to me when I asked about loans from my 401k...If you have $100K earning 10%/year it goes up to $110K this year. If you take a $50K loan then that $50K only goes up to $55K + your $50K loan + the interest you pay yourself back. Depends on that interest rate vs the rate your investments earn.
It also depends on how good the deal is on the place. I had some money in an IRA that I cashed out last year to put a down payment on my first place and pay off all other remaining debt. Of course I had to pay taxes on it and a 10% penalty on everything over 10k (first time homebuyer savings) but considering the deal I was getting on the place I bought and how great the location is, it was very much worth it. I could easily have paid 70k more for that place under other circumstances.
Plus it's a hell of a mental relief (worth every penny) to a) have my own place and be settled, not renting plus b) not have any debt besides a mortgage. First time I've been out of completely debt since my early 20s.
I'm ok with borrowing against the 401k for a downpayment if thats the only way you can avoid paying PMI. You can always take a 2nd mortgage to pay off the 401k loan early.
Also, the outlook for the stock market isn't the usual rosy 10% this year...if you have your money off the market this year it shouldn't make much of a difference.
1) you've already been told to not even consider taking the money out of the 401(k) directly - that's a complete no-brainer. the "cost" of that money is extraordinarily high - you give up tax-preferenced savings that you can't get back (you'll never be able to re-contribute for the years you'd be taking back) and you pay a 10% penalty on top of regular taxes, so you'd probably have to have nearly $100k in your 401(k) to get the $50k that you want. that's some expensive money.
2) even a loan against your 401(k) for a home purchase makes little sense for most people. your retirement savings should be set aside and not touched, as FW indicates, unless it is an emergency.
3) this is an awful time to buy a house. please think hard about this potential purchase. even people paid by the real estate industry to promote home purchases, and people whose livelihood depends on a strong real estate market (like CEOs of home builders), are predicting declining home values during 2007.
if you insist on purchasing a home because you've bought into the realtor hype, please first spend a few days researching real estate trends, including recent stories in the wall street journal, and also a housing bubble blog or two such as
, or one that is more local to you.
finally, ask yourself this question - if you, an individual who is responsible enough to have amassed at least $50k in his 401(k) at an apparently relatively young age, need to raid your retirement savings in order to be able to get your foot in the door, who is going to buy this home from you for a greater sum of money in the future? 2 years ago the mantra was "buy now or be priced out forever". now i'm reading realtors who can't make a sale saying "all the potential buyers have been priced out." exactly.
"Early Withdrawl": what's that, like a little kid with a southern accent?
boo ya!
I don't know about a 401k, but I believe you can take a tax-exempt distribution from an IRA for a first time home purchase or, if you borrow it, I believe you have 60 days to put the money back without penalty. Don't quote me on this, and I am not necessarily recommendeing it, but you may want to check with a tax advisor to see if 401ks work the same way.
Generally a loan may be up to 50% of your vested account balance less the highest outstanding loan balance from the past 12 months. Plans differ on the length of a loan for the purchase of a primary residence but most tend to be in the 15-20 year range. Rates tend to be Prime +2 percent.
As mentioned before, not all plans allow for loans.
Sagarin wrote:
I don't know about a 401k, but I believe you can take a tax-exempt distribution from an IRA for a first time home purchase
No you still have to pay taxes. And you have to pay a 10% penalty for early withdrawal as well.
The special deal for first time home buyers is that they don't have to pay the 10% penalty on the first 10,000 of the withdrawal.
Everything beyond that, you still have to pay taxes + 10%