401k cash out

[yes]

I have about 30k in my 401k which was once at 50k. I have a chance to buy a house that would have about 30k in equity, which i would use my 401k as a down payment. I could then rent my current house for a couple hundred a month profit, hoping to sell it when the market picks up for about 40k more than i owe. Good idea or bad

[sweeps]

I would have to say "no" to yes

[Broken Arrow]

I would have to say yes to the no to yes.

[disneysteve]

I would also say NO.

Retirement plans are for... RETIREMENT! They are not for buying houses or cars or sending your kids to college or paying off your credit cards.

What happens when you cash out that 30K? First, you're making the classic investing mistake of buying high and selling low. You give up any chance of your investment recovering. You're locking in the losses. Second, you have to pay income tax on the money, so knock off 25% or whatever your tax bracket is. Third, assuming you are not of retirement age, you have to pay a 10% penalty. That means from that 30K, you would actually only receive about 21K. You aren't happy that you've lost 20K so far but you are willing to throw away another 9K voluntarily? That just doesn't make any sense.

[creditcardfree]

No, not a good idea. If you can't afford to buy a second home without raiding your retirement, then you can't afford it.

[yes]

All true, but to me im just changing my investment. When the housing market returns wouldnt i make more on my return when i sell and could then reinvest.

[boosami]

By cashing out your 401(k) you're permanently locking the $20k in losses. It's buying high and selling low, as DS mentioned.

The housing market is not going to return. The days of "flipping" homes is over. The market is adjusting to the fact that home values rose too fast in comparison to people's salaries. Think about it: If salaries go up 3% a year and homes go up 10% a year, eventually no one will be able to afford a home. It's not sustainable. Values are staying static or dropping, and will continue to do so until they get back to normal range with what money people actually make.

A family makes $50,000
They can afford a $150,000 home
Average home price is $150,000

***salaries go up 3%/yr; homes go up 10%/yr***

TEN YEARS LATER
The family now makes $70,000
They can afford a $210,000 home
Average home price is $350,000

***salaries go up 3%/yr; homes go up 10%/yr***

ANOTHER TEN YEARS LATER
The family now makes $85,000
They can afford a $255,000 home
Average home price is $900,000

***salaries go up 3%/yr; homes go up 10%/yr***

ANOTHER TEN YEARS LATER
The family now makes $120,000
They can afford a $360,000 home
Average home price is $2,350,000

[jIM_Ohio]

Originally Posted by boosami

By cashing out your 401(k) you're permanently locking the $20k in losses. It's buying high and selling low, as DS mentioned.

The housing market is not going to return. The days of "flipping" homes is over. The market is adjusting to the fact that home values rose too fast in comparison to people's salaries. Think about it: If salaries go up 3% a year and homes go up 10% a year, eventually no one will be able to afford a home. It's not sustainable. Values are staying static or dropping, and will continue to do so until they get back to normal range with what money people actually make.

A family makes $50,000
They can afford a $150,000 home
Average home price is $150,000

***salaries go up 3%/yr; homes go up 10%/yr***

TEN YEARS LATER
The family now makes $70,000
They can afford a $210,000 home
Average home price is $350,000

***salaries go up 3%/yr; homes go up 10%/yr***

ANOTHER TEN YEARS LATER
The family now makes $85,000
They can afford a $255,000 home
Average home price is $900,000

***salaries go up 3%/yr; homes go up 10%/yr***

ANOTHER TEN YEARS LATER
The family now makes $120,000
They can afford a $360,000 home
Average home price is $2,350,000

which 10 year period are we in now?

[boosami]

Originally Posted by jIM_Ohio

which 10 year period are we in now?

None, just a hypothetical example. Just showing that in a macro sense, the housing market can and will not keep going up in value compared to personal wealth.

[autoxer]

Originally Posted by yes

All true, but to me im just changing my investment. When the housing market returns wouldnt i make more on my return when i sell and could then reinvest.

Why change your investment? I would much rather have my retirement funds in a long term mutual fund, then in a speculative property.

And the extra losses for cashing out make it a lot worse.

[normaldude]

Originally Posted by yes

All true, but to me im just changing my investment. When the housing market returns wouldnt i make more on my return when i sell and could then reinvest.

Japan real estate has declined for 18 years straight.

In many ways, the US real estate bubble collapse could be even worse.

http://www.economist.com/images/20050618/CSF103.gif

If the current stock market volatility bothers you, then just shift your 401k holdings to more bond funds & money market funds.

[yorkinvestmentreport]

Originally Posted by normaldude

Japan real estate has declined for 18 years straight.

In many ways, the US real estate bubble collapse could be even worse.


If the current stock market volatility bothers you, then just shift your 401k holdings to more bond funds & money market funds.

The US / Japan comparion is often over used. I'm not saying it can't happen, but Japan's post bubble issues were due to their reaction (the banks not writing down bad assets fast enough) and their aging / shrinking population. Banks in the US are aggressively writing down loans and we continue to have a growing population

[normaldude]

Originally Posted by yorkinvestmentreport

The US / Japan comparion is often over used. I'm not saying it can't happen, but Japan's post bubble issues were due to their reaction (the banks not writing down bad assets fast enough) and their aging / shrinking population. Banks in the US are aggressively writing down loans and we continue to have a growing population

Japan's problem was that the government was using the country's resources to prop up the worst banks. Plus, the government tried to prop up the economy by encouraging additional borrowing with a zero interest rate policy.

And that's exactly what America is doing.