401K cash out

[justglfish123]

Would like to get opinions on this. Before everyone starts throwing stones at this read the entire post.

My wife and I are looking at purchasing a home. We were going to purchase one in the summer but with interest rates dropping below 6% and possibly lower this week we have starting looking once again. Not sure what the market will look like in the summer. I work for a state agency and we have the Teacher's Retirement plan. I am 37 years old and will likely stay here until I retire. I put 8% of my paycheck a month into TRS and the organization turns around and matches that. In addition I get and extra $500 a month put into investment funds of my choice. I still have a 401K from my previous company that has around 40K invested. Based on my future situation would it be ridiculous to cash in to purchase a home which would enable us to put enough down to avoid PMI and reduce our payment by nearly $300/month? One way to look at it is we would recoop the loss within 10 years of owning the house based on saving and extra $300/month. I would probably get around $28K after taxes and 10% penalty. Normally I wouldn't consider this but with my aggressive retirement strategy that I have at my work and low interest rates I am considering it. Your opinions please.

[jIM_Ohio]

Of that 40k you will cash out, you will net maybe 20k. Pay taxes at highest bracket for you (guessing 25%), plus a 10% penalty, plus state taxes (0-10%).

If you slowed down the TRS contributions some, you could have 20k in a year or two. And still have the 40k around, compounding.

I would suggest getting a house with an 80-10-10 loan before cashing in 40k to get 20k. 80% 1st morgage, borrowed, 10% second mortgage, borrowed, 10% down. Even 80-15-5 will work better than cashing out the 401k.

[justglfish123]

[quote=jIM_Ohio;147537]Of that 40k you will cash out, you will net maybe 20k. Pay taxes at highest bracket for you (guessing 25%), plus a 10% penalty, plus state taxes (0-10%).

If you slowed down the TRS contributions some, you could have 20k in a year or two. And still have the 40k around, compounding.

I would suggest getting a house with an 80-10-10 loan before cashing in 40k to get 20k. 80% 1st morgage, borrowed, 10% second mortgage, borrowed, 10%




Well unfortunately there is not option to lower the TRS contributions. It's an all or nothing. I've done the math and I should net around 28K, maybe a little less but close to it. I have considered the 80-10-10 loan but really not a fan of having a 2nd mortgage on a home. I may look into it again. Thanks for your input. Anyone else?

[LivingAlmostLarge]

Yeah it's a bad idea. You'll be paying top dollar for it and then you'll pay a penalty on it I'd rather do a second mortgage when you consider the interest. You'll be paying 50% in taxes instead of 10%? That doesn't quite work.

$40k 15% = $6k, 10% = $4k and then state taxes. This is on top of your income, so then if you are married if you make $25k you'll be in the 25% bracket which starts at $65k.

[terry1156]

How much is the mortgage you are considering taking out? It seems to me that unless it is really huge, you should be able to pay it down with extra payments to get it under the 20% so you can cancel the PMI fairly quickly.

[sweeps]

Originally Posted by justglfish123

my aggressive retirement strategy

Taking an early 401k withdrawal contradicts the idea of an aggressive retirement strategy. Your retirement plans are a much more effective vehicle for maximizing wealth than your house.

[justglfish123]

I appreciate all your advice and have decided not to take out the 401K. I rarely if ever see a situation where it's benefitial to take it out and though it is for a home (investment) the penality of taking it out is just to big. Thanks again.

[tripods68]

You can avoid the 10% penalty, if you rollover that 401(k) to self directed investment account like an IRA. But there could be a 20% withholding (check with your 401K administrator first ), I like to say no. But let say they withhold anyway, you'll net $32K, you can then apply the first $10K (without penalty) towards closing cost or down payment for first time home buyer.

[getrichslow]

Don't cash the 401k. Also reconsider being patient on the house. I know it is hard to wait but rates will likely stay low for some time and most national markets are predicted to see prices drop even further (source Fox Business Cavuto and WSJ Editoral Report).

[justglfish123]

Originally Posted by getrichslow

Don't cash the 401k. Also reconsider being patient on the house. I know it is hard to wait but rates will likely stay low for some time and most national markets are predicted to see prices drop even further (source Fox Business Cavuto and WSJ Editoral Report).

Yes I heard this morning that rates are supposed to drop within the week. If we decide to buy the house we will wait until next week to lock in the rate. I live in Oklahoma and our housing market isn't nearly as bad as the rest of the country. The new housing market is doing great but buying a used home is not nearly as good. We are purchasing a used home.

[jIM_Ohio]

Originally Posted by tripods68

You can avoid the 10% penalty, if you rollover that 401(k) to self directed investment account like an IRA. But there could be a 20% withholding (check with your 401K administrator first ), I like to say no. But let say they withhold anyway, you'll net $32K, you can then apply the first $10K (without penalty) towards closing cost or down payment for first time home buyer.

I think this is bad/misleading on many levels.

There are no penalties on doing a 401k rollover to an IRA (rollover IRA).

But early withdraws from IRA will have the same penalities as the 401k.

In both cases the 401k/IRA custodian will withhold money if check is made out to an individual.

If doing a rollover and a check is made out to another custodian, the rollover is 100% of the balance. It was the 3 times I have done a rollover (two for me, one for wife).

[justglfish123]

Thanks for clarifying Jim (Ohio). It didn't sound correct to me but either way I have decided touching the 401K other than a rollover situation is not an option.

[tripods68]

Originally Posted by jIM_Ohio

I think this is bad/misleading on many levels.

"You can avoid the 10% penalty, if you rollover that 401(k) to self directed investment account like an IRA" Where is the bad/misleading part in this statement.

Originally Posted by jIM_Ohio

But early withdraws from IRA will have the same penalities as the 401k.).

I never mention anything about early withdrawal penalty. I was referring to the first 10K of his $32K that he can use towards closing cost or down payment as First Time Homebuyer without 10% penalty.

I do agree with you about withholding. There might not be a withholding penalty if his custodian cut the check directly to him. But there are stills banks out there that do not offer electronic transfer directly to other banks and simply cut the check directly to the member. It's simple and easier for the bank to manage I think. That is why I encourage him to call his 401(k) administrator since that information is proprietory.

[justglfish123]

Originally Posted by tripods68

"You can avoid the 10% penalty, if you rollover that 401(k) to self directed investment account like an IRA" Where is the bad/misleading part in this statement.



I never mention anything about early withdrawal penalty. I was referring to the first 10K of his $32K that he can use towards closing cost or down payment as First Time Homebuyer without 10% penalty.

I do agree with you about withholding. There might not be a withholding penalty if his custodian cut the check directly to him. But there are stills banks out there that do not offer electronic transfer directly to other banks and simply cut the check directly to the member. It's simple and easier for the bank to manage I think. That is why I encourage him to call his 401(k) administrator since that information is proprietory.

I appreciate your input but what blows this out of the water for us is we are not first time homebuyers. Someone mentioned something like this to us before but they were assuming we didn't already own a home. I didn't mention that in my post. Thanks.

[theadvisorman]

"Patience is the best medicine." You made a good choice by not taking one step forward and 10 backward. I would reccomend that you roll this previous 401(K) into a Traditional IRA (it hasn't been taxed yet). This will / can give you much more flexibility in the investment options - making you the "administartor" of the plan. I would ask you to consider reading about a company called, "American Funds". Its interesting that in the WSJ it posts the 10 largest funds, of those 7 are American Funds. This speaks volumes of the affectiveness of the fund managers. The expenses are low, but in this world one tends to be willing to pay a little more to gain more.

[sweeps]

Originally Posted by theadvisorman

I would ask you to consider reading about a company called, "American Funds". Its interesting that in the WSJ it posts the 10 largest funds, of those 7 are American Funds. This speaks volumes of the affectiveness of the fund managers. The expenses are low, but in this world one tends to be willing to pay a little more to gain more.

No, it speaks volumes to the effectiveness of the salespeople pushing the funds. The expenses are not low when you factor in sales charges.

[Broken Arrow]

The irony is that the larger the fund, the harder it is to "move the needle".

That and the manager has to settle for less-than-ideal investments in order to fulfill its legal requirements in diversification.

To exacerbate the situation, many casual investors equate the size of the fund as some kind of measure of success. So, they'll jump onboard, causing a fund to become even larger and unwieldy still.

In the end, I wouldn't recommend measuring an actively managed fund's success by its size. Perhaps the most important factor is the fund manager himself, because in the end, that's what you're really investing (especially if they are fairly active and have high turnover rates on their portfolio). After that, I would say to be aware of expenses and fees. After all, even if an actively managed fund does well, it may not be such a great deal for YOU (the person who matters the most here) when it is watered down by the fees and expenses.

[theadvisorman]

No, it speaks volumes to the effectiveness of the salespeople pushing the funds. The expenses are not low when you factor in sales charges.

1. What do you consider low? Beware...When you shop at Walmart don't be suprised when you get Walmart quality. Is always paying bottom dollar the best? If you will compare the expenses of well managed funds - good returns over a lengthy period - you will find American Funds to be "low" for what they generate.

2. It seems you make general conclusions based on your quick view without considering the thought that your entire perception may be inacurate. I DO NOT push...people who are good at what they do LEAD others with the right heart and intensions. Do Your Homework ...I did. I can choose from any funds out there but this is where I tend to rest.


In the end, I wouldn't recommend measuring an actively managed fund's success by its size. Perhaps the most important factor is the fund manager himself, because in the end, that's what you're really investing (especially if they are fairly active and have high turnover rates on their portfolio). After that, I would say to be aware of expenses and fees. After all, even if an actively managed fund does well, it may not be such a great deal for YOU (the person who matters the most here) when it is watered down by the fees and expenses.

1. My point exactly. These funds grew to being what they are today because of good fund managers. To me this proves that they are doing something right to now have 7 of the 10 largest funds listed.

[sweeps]

Originally Posted by theadvisorman

It seems you make general conclusions based on your quick view without considering the thought that your entire perception may be inacurate. I DO NOT push...people who are good at what they do LEAD others with the right heart and intensions. Do Your Homework ...I did. I can choose from any funds out there but this is where I tend to rest.

My conclusions aren't based a "quick view". They're based on long-term studies done by a lot of smart people.

Sorry if I seem cynical, but I'm expecting a link to your web site and a sales pitch in the near future.

[Broken Arrow]

Relevant article.

I think it's a fairly balanced article, but as it has pointed out, size should be signal for concern.