Liquidate 401k for home purchase

[riverwed070707]

At what price point are you buying that you need a $90k downpayment?? You'd do well to listen to the others. If you need further evidence, take into consideration that your calculations show you'd actually come out ahead if you don't buy at all. Further, you will not be saving money by buying - you'll have remodeling needs, new furniture purchases, reroofing costs, etc etc etc. Good job saving while you were paying off your chapter 13... don't mess it up by pulling it out. 3 bedrooms is not tight for a family of 4. Suck it up a while longer while you save a down payment.

[JoeP]

Maybe I missed it, but can you dial back the amount you are putting into your 401k, and put that money into a separate (safe) place with a goal of using it for a down payment 5 years or so in the future? That way, you'll still have the benefit of time for the nest egg in your 401k.

If you don't have it already, consider the risk exposure you should be covering with term life insurance.

[sblatner]

I think I agree with everyone else but I feel like the poster is being penalized for putting everything he can into his 401k to keep it away from the creditors. Now he has no liquid cash to buy a house.

[disneysteve]

I think I agree with everyone else but I feel like the poster is being penalized for putting everything he can into his 401k to keep it away from the creditors. Now he has no liquid cash to buy a house.

He's not being penalized. He has a great start on retirement. I have no problem with him cutting back on 401k contributions to save up the down payment. As long as he doesn't take out what he has already saved in the 401k.

[doingitallwrong]

You do seem pretty determined to do this despite the dire warnings to the contrary. I won't give you those; as my username implies, I've done the wrong thing a lot of the time, so I can see the reasoning behind your question. (I didn't use my retirement money to buy a house, but I've used it for other things. I don't exactly regret it, but I probably will in 15-20 years when I want to retire!) Basically, you were using your 401(k) as a savings account while you were going through the bankruptcy process; in a different situation you may not have maxed out the 401(k)s but instead put some of that $30K/year into a regular savings account. The downside is that, of course, now your "savings" is tied up and you're penalized for accessing it.

I think you may have a few options. First you need to find out if your 401(k) plan even allows a hardship withdrawal for a first-time home purchase -- not all of them do. Also, you can only take your own contributions as a hardship withdrawal -- you can't take earnings or your employer match. You'll also be prohibited from contributing to the 401(k) for six months.

I wouldn't wipe out your entire 401(k) regardless. If you're making 5-10% per year that's still probably more than your interest rate on a mortgage. It makes no sense to give up 7.5% (average) compounded return when you're only paying 5% on a mortgage. (If the mortgage were 18%, it might be different.) You'd need $40-45K for a downpayment, you'd take out say $60K to cover taxes, penalty and closing costs. That leaves you with $150K in the 401(k) and a mortgage of about $180K, and you'd still save about $600 a month off your rent (though you'd have taxes and insurance to pay from that). (The other consideration, if you wipe out the 401(k), is what happens if you lose your job and don't get one that offers a 401(k), or aren't making enough to contribute $30-40K per year to catch up? By taking just the downpayment amount, you've at least still got a decent chunk of money in your 401(k) that will keep earning.)

If you stop contributing to your 401(k) entirely, it would take you two years to save for your downpayment. ($30K less 25% tax nets you $22,500 per year.)

If you take $60K from your 401(k) you're throwing away $6K on the penalty. (You'd also pay $15K in taxes, but you'll pay that eventually regardless.) Assuming taxes + insurance are $400/month (totally wild guess), it would take you 2.5 years to make that up in what you're saving on rent, and of course that doesn't include the lost earnings.

If you can do an in-service distribution (you probably can't, most plans don't allow it), you can rollover $55K into an IRA and then take the distribution from the IRA. There's no 10% penalty on an early IRA withdrawal for a first-time home purchase, but of course you'd still pay about $14K in taxes. (You cannot rollover a hardship distribution to an IRA; it has to be specifically done as an in-service distribution.)

If you take a loan from your 401(k) (again, check with your plan sponsor -- not all plans allow it), the most you can take is 50% of your vested balance, up to a maximum of $50K. You must make payments on at least a quarterly basis -- often the payments are taken right out of your paycheck. Most 401(k) loans must be repaid within five years, but there may be an exception for the purchase of your primary home. Assuming they'd give you 10-15 years to pay it off, you're looking at $475-650 monthly payment.

The loan repayment amount will be considered in your debt-to-income ratio when you apply for a mortgage. If you terminate employment, you must repay the outstanding loan balance within 60-90 days, or it will be treated as a distribution and you'll pay taxes and the penalty on it. You do pay interest on a 401(k) loan, but you're paying it to yourself. On the other hand, while you're not taxed on the loan itself, it's repaid with post-tax money, and then you're taxed again when you take the money out in retirement. So in your scenario, you'd pay $15K on the principal amount, you'd pay yourself $15-25K in interest (but you'd also pay $3,750-6,250 tax on that amount), and then you'd pay $15K in taxes when you take the money out in the future. (So you'd have a net tax of about $11-19K.) Lots of assumptions about tax rates, interest rates, repayment periods, etc.

The cheapest, cleanest, and most financially sound option is to just save up for two years, of course. However, from the "doing it wrong" point of view, taking just the downpayment amount as a 401(k) withdrawal isn't going to set you back too horribly in the long run. I don't advise it, from a been-there-done-that point of view, but I don't think it's the absolute worst thing you could ever do. Most (maybe all!) here will disagree with me, though.

[Singuy]

http://www.investopedia.com/articles...easons401k.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.

Borrowing against your 401k to buy a house is fine mathmatically Steve.

Say you want to buy something that is 50k with a 4% interest.
You can borrow against your 401k and pay interest to yourself
Or you can pay the bank interest (and let your 401k earn 4% return), either way it's the same.
Both cancels each other out..but you do get the benefit of borrowing less money from the bank(so you pay less taxes at closing).


Now if you lose your match or additional contribution to your 401k by borrowing against it, then it'll be a bad idea.

[snafu]

Welcome to SA. In your introduction, you explained that you were young, made mistakes and ultimately filed Chapter 13 bankruptcy. We'd like to stop you from making an even bigger mistake, liquidating retirement funds, paying tax and penalties. The whole point of a retirement fund is to provide income for the 35 or so years of retirement when there is no income but still a great many expenses. Your retirement fund depends on the wonders of many years of compounding to grow the contributions.

If you truly desire to buy a house, you'll set saving for a 20% downpayment as your goal and examine every dollar spent against that goal. It can be a fun challenge to give every dollar a 'job' and stretch money as far as possible. With the right attitude every meal prepared at home from scratch frees up downpayment dollars. Taking on a second, part time job moves up the move-in date. You'll have time needed to get your FICO score much higher which in turn qualifies you for a lower mortgage interest rate.

I'd start at the other side, going through your stuff and selling the items no longer used, things that don't serve your needs, stuff you don't like on Facebook sell page, CraigsList or local on-line sell site. The less you have the less work to pack and less cost to move.

[Petunia 100]

If you can do an in-service distribution (you probably can't, most plans don't allow it), you can rollover $55K into an IRA and then take the distribution from the IRA. There's no 10% penalty on an early IRA withdrawal for a first-time home purchase, but of course you'd still pay about $14K in taxes. (You cannot rollover a hardship distribution to an IRA; it has to be specifically done as an in-service distribution.)

The penalty exception applies to the first 10k only, and that is a lifetime limit. Just pointing it out.

[corn18]

I hope the OP hasn't gone away. He reminds me of me when I first started posting here. I had it all figured out and was looking for validation of my "great" ideas. I fought with you guys a lot because clearly you were not taking my situation into account. Glad I stayed. Glad I listened. Life is so much better now.

To the OP, please stay engaged and listen to these guys. They will NOT steer you wrong and they do consider all aspects of your situation.

Tom

[disneysteve]

Borrowing against your 401k to buy a house is fine mathmatically Steve.

Say you want to buy something that is 50k with a 4% interest.
You can borrow against your 401k and pay interest to yourself
Or you can pay the bank interest (and let your 401k earn 4% return), either way it's the same.
Both cancels each other out..but you do get the benefit of borrowing less money from the bank(so you pay less taxes at closing).


Now if you lose your match or additional contribution to your 401k by borrowing against it, then it'll be a bad idea.

1. Your 401k ought to be earning more than 4% on average over time. I'd say at least 6%.
2. If you lose or decide to leave your job while you have an outstanding 401k loan, it needs to be repaid immediately or it gets reclassified as an early withdrawal subject to penalty.
3. You fund your 401k with pre-tax dollars but repay the loan with post-tax dollars which then get taxed again when you start taking distributions in retirement.

So no, it is not mathematically the same, nor is the same level of risk involved.

[twarner85]

No, you guys have not ran me off. Actually, gave me the answers I was expecting.

I agree with the logic behind all you Answers. Although I still believe that my first idea may have offered the most for my retirement given the conditions as outlined. Its probably the riskier of the options.

Here is what I think we have decided to do. both of our 401ks allow us to roll over 10k into an IRA which we may use penalty free. We will then take an additional 25k from our emergency fund Which currently has about 60k. That will provide us with 45k down and our escrow payment should still save us a few hundred per month.

we would like to buy now for several reasons both personal and financially. With 2 kids renting our current place isnt stable enough and we both drive around an hour to and from work per day. Also the area we are looking to buy is a new development in a booming a booming area of town where home values are sure to skyrocket.

My issue with this plan is this. our emergency fund will drop below 50k. we would like to build that back around 60k and saving 25k at our current contributions into our 401ks would be difficult. we are thinking about dropping our Contribution, around half of what it currently is. We would do this for one year to build our account back up.
Is there a better option that we aren't thinking of.

[disneysteve]

Here is what I think we have decided to do. both of our 401ks allow us to roll over 10k into an IRA which we may use penalty free.

Is there a better option?

I think we've answered that question pretty clearly. Yes, there is a better option. DON'T DRAIN YOUR RETIREMENT SAVINGS TO BUY A HOUSE!

Good luck to you.

[rennigade]

Enough advice was given here. The majority think you should not cash out your 401k plans.

The bottom line is...its your money. Whether its a good idea or bad...its your decision in the end.

Excuse me now...im going to time the market and invest in penny stocks after which ill head to the nearest grocery store and send a $5,000 money order to my long lost relative so he can cash out $10 million from a prince he knows in another country and give me half.

[riverwed070707]

No, you guys have not ran me off. Actually, gave me the answers I was expecting.

I agree with the logic behind all you Answers. Although I still believe that my first idea may have offered the most for my retirement given the conditions as outlined. Its probably the riskier of the options.

Here is what I think we have decided to do. both of our 401ks allow us to roll over 10k into an IRA which we may use penalty free. We will then take an additional 25k from our emergency fund Which currently has about 60k. That will provide us with 45k down and our escrow payment should still save us a few hundred per month.

we would like to buy now for several reasons both personal and financially. With 2 kids renting our current place isnt stable enough and we both drive around an hour to and from work per day. Also the area we are looking to buy is a new development in a booming a booming area of town where home values are sure to skyrocket.

My issue with this plan is this. our emergency fund will drop below 50k. we would like to build that back around 60k and saving 25k at our current contributions into our 401ks would be difficult. we are thinking about dropping our Contribution, around half of what it currently is. We would do this for one year to build our account back up.
Is there a better option that we aren't thinking of.

Better option would be to use $45k out of your efund for the DP and drop your contributions until you build it back up to where you're comfortable.

You can't time the market - the best time to buy is when you're ready, not when the market is good or home prices might go up. If you aren't comfortable buying with the cash you have on hand, you aren't ready.

[Petunia 100]

No, you guys have not ran me off. Actually, gave me the answers I was expecting.

I agree with the logic behind all you Answers. Although I still believe that my first idea may have offered the most for my retirement given the conditions as outlined. Its probably the riskier of the options.

Here is what I think we have decided to do. both of our 401ks allow us to roll over 10k into an IRA which we may use penalty free. We will then take an additional 25k from our emergency fund Which currently has about 60k. That will provide us with 45k down and our escrow payment should still save us a few hundred per month.

we would like to buy now for several reasons both personal and financially. With 2 kids renting our current place isnt stable enough and we both drive around an hour to and from work per day. Also the area we are looking to buy is a new development in a booming a booming area of town where home values are sure to skyrocket.

My issue with this plan is this. our emergency fund will drop below 50k. we would like to build that back around 60k and saving 25k at our current contributions into our 401ks would be difficult. we are thinking about dropping our Contribution, around half of what it currently is. We would do this for one year to build our account back up.
Is there a better option that we aren't thinking of.

Just pull all the money from savings and leave your 401ks alone. Trim your contributions way back to rebuild your savings. Also, consider funding Roths for you and your wife.