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July 22, 2009
Tapping 401(k) for Purchase?
I've read some of the pros and lots of cons of dipping into your 401(k) for purchasing a home. I wanted to know if anyone on this forum went this route or if they know of anyone who has? Do they have any regrets? Would they recommend it? Any information/advice about 401(k)s and purchasing a home welcomed!
Thanks in advance.
Comments
I was told by my financial advisor that there is no penalty for early disbursement from an IRA, but there is a penalty for withdrawing from a 401(k), so I rolled over $10k of funds into an IRA to withdraw -- the IRS permits up to $10k of early disbursement from an IRA for a qualified first time home purchase. If you are able to, I would rollover funds from the 401k into an IRA.
I was advised NOT to take out money from my 401k/403b to finance a home purchase -- the penalties and taxes pretty much make it not worthwhile. Your situation may vary, but I was told that it's generally not a good idea. I believe some lenders may allow you to borrow against your 401k, but with the $10k from my IRA, I didn't need to go that route.
Good luck!
Posted by: brooklynstyle at July 22, 2009 12:47 PM
There are no penalties from borrowing from your 401(k) (which is different from withdrawing from it). I did it to have enough cash for a down payment, and then paid it back over a five-year period (through automatic monthly payments from my paycheck). Downsides: you're losing out on any earnings on that money that you borrowed (not so much of an issue now, perhaps, when most people's 401(k)s are tanking); you're repaying with post-tax money, whereas the original cash in the 401(k) was pre-tax; and if you lose your job you have to pay the loan back in full right away. But if you're secure in your job situation, I think it's a reasonable route, since you're essentially borrowing from yourself.
Posted by: Park Sloper at July 22, 2009 1:46 PM
brooklynstyle- you're right about being able to withdraw penalty free from your IRA up to 10K (only once in a lifetime) but you have to pay taxes (not the penalty- but applicable taxes). Also- the rules are slightly different for a Roth IRA (timing restriction). Talk to your tax person. 10K may really only be 6K of usable dollars- and some tax experts say spouses can do it to (so if your husband or wife has their own IRA- they also can pull out 10K penalty free). Whether its a good idea or not really is up to you and your situation. If you have to put less down but pay PMI (which is difficult to get today) in order to fund a desired purchase- than maybe its better to take money out of the IRA in order to get to a 20% down payment. If you're doing this and still come short of the 20%- think about whether you're stretching yourself too thin.
FYI- taking money out from a 401k is not a withdrawal- it is a loan- and not every plan allows for it. You have to pay it back- with interest. Some people say its interest you pay yourself so its no big deal. Some people say it robs you of your retirement. If you take the loan- and you're still able to fund your 401k exactly the same as before AND can repay the loan- then it may not be a bad idea. You really have to run the numbers though to see if it makes sense.
Posted by: panda10 at July 22, 2009 1:52 PM
I did the loan and paid it back immediately. Many banks/boards like to see X months of money in your bank account for reserves, and a loan will immediate payback works well for this purpose.
Posted by: asdf at July 22, 2009 1:55 PM
the sad thing is i wanted to tap into my 401k savings to buy a PS3 only to find out i didnt have that much in it :-/
*rob*
Posted by: PitbullNYC at July 22, 2009 2:02 PM
i borrowed from mine and paid it back through payroll deductions and continued to contribute. it was a big help for us - it is borrowing from 'yourself'.
Posted by: bkny at July 22, 2009 2:16 PM
Use 401 for its purpose, not its pitfalls. Housing and its reserve funds should be seperate from your retirement. The time required to save will probably be the time the market bottoms.
***Bid half off peak comps***
Posted by: Brownstones Half Off at July 22, 2009 2:23 PM
I borrowed from my 401K and then changed jobs and had to pay it back immediately. Even if you don't lose your job, the loans can handcuff you to your current job if you wanted to make a change.
Posted by: trudylou at July 22, 2009 2:57 PM
If you have to tap into your 401(k) to buy, should you really be buying?
Posted by: lechacal at July 22, 2009 3:13 PM
I would say absolutely no.
But perhaps if income prop (multi-family) maybe..but only maybe
Posted by: Petebklyn at July 22, 2009 3:16 PM
@lechacal - I dont have to tap into the 401(k). It was just a thought incase more $ is needed. Great responses from all!
Posted by: guikazoid at July 22, 2009 3:39 PM
open a loan line against 401K as collateral.
Posted by: bobjohn at July 22, 2009 4:24 PM
Your 401K plan administrator will tell you your company's rules/restrictions for borrowing against your account to purchase your first home. In my case, my purchase agreement could not have a closing date more than 90 days after execution of same. That's just one example. Additionally, I agree w/panda10 @ 152pm:
"If you take the loan- and you're still able to fund your 401k exactly the same as before AND can repay the loan- then it may not be a bad idea."
Posted by: vw at July 22, 2009 4:51 PM
I borrowed from my 401k and changed jobs a yr later..i did not have to pay back the loan..i continued to make payments directly to T Rowe. Its specific to the t&cs of your plan.
Posted by: jamdown at July 22, 2009 10:42 PM
It's great to take advantage of the IRA for first time home purchase and if it is a Roth IRA then no penalty or taxes on it. FOr your 401 K it's also great that you can take out a loan. Either way it's a good way of financing the purchase- I did it this way and was fortunate enough to catch up on my retirement savings and far surpass what I had used in about 5 years.
Posted by: argentina at July 22, 2009 11:11 PM
It really is a good advantage if you have money invested in a 401k account, enough to buy you a house for preferably cash. For instance, assume you have $150k cash in your 401k, experts suggest rolling it over to a Self directed IRA from which you can use the funds (100% of the funds) to buy a house. However, the percentage of money you should take out from your self directed IRA depends on the amount of savings you have.
Once you have a self-directed IRA set up, consider purchasing actual physical real estate by withdrawing funds from your IRA to make a down payment on the home, and get a mortgage, or if you have enough funds, purchase the entire home by paying 100% cash.
Source: http://www.research401krollover.com/
You are not allowed to take a mortgage from your IRA, like how you would take out a loan from your 401(k) and pay it back in a certain period of time. When purchasing property from your IRA, remember this key point that all gains you make from this property such as rental income, capital gains, etc must be contributed back in to your IRA.
Posted by: cocojambo at November 14, 2009 12:07 PM
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