Liquidate 401k for home purchase

[twarner85]

Okay, excuse me if I am in the wrong section and fee free to point me in the right direction. Here is my question in the mean time..

Nearly five years ago my wife and I chose to file for chapter 13 bankruptcy. We were young, just married, good credit and stupid with the little money we had. In 2009 when the economy took a turn for the worse we both lost money at our jobs and it was really our only way out as we seen it anyway.
5 years later we have successfully completed the repayment plan for chapter 13. Our credit scores are right around 680 believe it or not! Whiless in bankruptcy we both landed great jobs that offer great pensions and pay. We have no debt currently. Since 401k was protected in the chapter 13 process we were both maxing out our 401k.
my question is. Should we consider taking a hardship withdrawal for the purchase of our first home (downpayment anyway). I think yes and here is why.
For 5 years our money has been growing in there at about 5-10% rate of return. At the percentage we are putting in our employer contributions equal about 11%. If we use the money for a downpayment we will save on PMI we will save on interest rate and our loan term will be a 15 year. I understand we will be taxed on the withdraw. And there is a 10 percent penalty. Our employer contribution pretty much covers the penalty. And we have benefited from the decent rate of Return. I think this was a better move then putting the money in a savings account. Since money going into savings accounts are already taxed and they don't offer great interest rates. Also the money is readily available which could be bad. we are only 27 and 29 and will restart our 401k as soon as we can.

[Petunia 100]

A 401k loan would be better than a 401k withdrawal.

Better than either is to save up a down payment while your credit score is recovering. Buying a house before you are financially ready to do so is a bad idea.

[Fishindude77]

NO, NO and NO !

Maintaining a 401k and contributing to such is the single best financial decision you have made considering bankruptcy problems, etc. That money is for retirement and should not be touched until retirement.

You obviously have a roof over your heads now and are doing OK. Slow down and build an emergency fund, keep putting money away for retirement, save up a 20% down payment and then start looking for a home.

[disneysteve]

NO, NO and NO !

Maintaining a 401k and contributing to such is the single best financial decision you have made considering bankruptcy problems, etc. That money is for retirement and should not be touched until retirement.

You obviously have a roof over your heads now and are doing OK. Slow down and build an emergency fund, keep putting money away for retirement, save up a 20% down payment and then start looking for a home.

I agree 100%. Do not touch your 401k for anything at all, ever, except retirement.

If you can't afford to buy a house without raiding your retirement savings, then you can't afford to buy a house.

[twarner85]

Thanks for the reply guys. I understand conventional wisdom says to keep the 401k. However I wasn't putting the money in for conventional reasons. We have been putting 30,000 plus in our 401k per year for 5 years to take advantage of the annual return and to protect our savings from the bankruptcy court. We have a savings account with around 4 or 5 months salary. Houses are at a low in our area right now and renting is at a premium. Our rent currently is 1500 per month for a 3 bed 1.5 bath. We have two children and space is tight. If I did my math correctly we should be able to save 8-900 on housing per month and in 12-15 years when it is paid off we would save an additional 3-400. We can afford to keep our 401k maxed out. If we start saving in a savings account we would have to significantly reduce the amount we were putting into 401k for a few years. like I stated about we have a pretty good pension plan, we're both under 30 and having a house paid off before we are 45 would allow us to invest more into retirement and also take advantage of the catch up contributions 401k has For older individuals. At 1500 a month for rent that's 18,000 per year down the drain until we can afford a down payment. We have been pretty approved for 250,000 at a decent interest rate for a 30 year But that is assuming at least 20 percent Down. taking a loan against the 401k for just the 20 percent down is an option. Is it a better option? We are looking at houses in the 200-220 range. and after a 401k withdrawal, taxes and penalties we would have a loan out for less then 50,000

[disneysteve]

having a house paid off before we are 45 would allow us to invest more into retirement

This is absolutely and completely wrong. The time to sock money away for retirement is when you are young, not when you're 45. It's too late then. You need to have time on your side, which you have now. Compounding over decades is what builds your nest egg. If you drain the 401k now (or borrow against it), you're taking away the single biggest contributor to building wealth: TIME.

Tapping the 401k to buy a house will undoubtedly be the biggest financial mistake you ever make in your life, even worse than whatever led you into bankruptcy.

[Fishindude77]

Figure out a way to buy without tapping the 401K or the long and short of it is ... you can't afford to buy.

Keep slamming money in that 401K, you're going to need it later in life.

[twarner85]

I feel like my situation isn't being taken in.. here are 3 examples of my options. Maybe after taking a look you will see it through my eyes a little better
all examples are considering 30 years to retirement. I'll be 59.5 they all also take into consideration. My 210,000 in 401k, 1500 for rent and a 4% rate of return on investment for the 30 years.



EX 1
take a withdrawal bring 401k to zero
Buy house at 15 year mortgage
increase investment from 30k to 40k (money saved yearly on housing)
investment balance after 30 years
***** 2.25 million*****
Ex 2. Keep 210,000 in 401k
take off 3 years off investing to save for down payment
buy house at 30 year mortgage save 300 monthly
invest 33k for 27 more years (3 years off for saving)
Investment balance
*****2.15 million*****

Ex 3.
Keep 210,000
rent for 30 years
invest 30k per year for 30 years
investment balance
**** 2.53 million****

[ua_guy]

No. Simply cutting back your contribution temporarily while you save 20% down payment on your house is a better strategy. Withdrawing money from a 401k comes at a very high opportunity cost at your age, and the advice given to you isn't "just" conventional wisdom, it's proven strategy used by members who are much older than you.

[disneysteve]

Taking money from your 401k is akin to borrowing at a 35-45% interest rate. Think of it that way. There is a 10% penalty. There is 25% income tax. And there is state tax, if your state has one.

It makes no sense under any circumstances to borrow money at 35+% to buy a house.

[Fishindude77]

Feels like you're going to buy that house and simply waiting to hear an answer that suits you, while in the back of your mind you know it's a bad decision.

Glad I raided my 401K in my late 20's ....... said no retiree ever.

[disneysteve]

Feels like you're going to buy that house and simply waiting to hear an answer that suits you,

Yep. My thoughts exactly.

[bjl584]

You're not ready to buy a house.

Keep saving. Buy when you are financially ready to do so. 401K's are for retirement.

[Singuy]

I'm sorry but why can't you borrow against your 401k?

Withdrawing 401k is a pretty bad idea because of the penalty AND the 25% income tax on top of it. I understand your match pretty much covers the cost but you are still losing YOUR money overall. The interest you will save from early completion of the mortgage and the 401k annual rate of return pretty much cancels each other out....so what you are doing is pretty much losing 35% off the bat from your 401k so financially it doesn't make sense(regardless if you believe in retirement savings/401k savings or not).

[disneysteve]

I'm sorry but why can't you borrow against your 401k?

http://www.investopedia.com/articles/retirement/06/eightreasons401k.asp

http://www.cnbc.com/id/101848407

Retirement accounts are for retirement. They are not for buying a home. They are not for paying off credit card debt. They are not for sending your kids to college. They are for retirement. That's it. Nothing else.