401k withdrawal for home down payment

[ua_guy]

Riverwed raised a good question above...what are they currently doing with their "disposable" income that would go to covering the $8k/month mortgage? If retirement savings are already shored up and they have that much cash on a monthly basis, why not look for a much more affordable home as a vacation/rental/ or future retirement property?

[bjl584]

Probably not a good idea for most people.
But my cousin did it, and he is doing just fine.

Seems like it's not totally black and white

[LivingAlmostLarge]

Riverwed raised a good question above...what are they currently doing with their "disposable" income that would go to covering the $8k/month mortgage? If retirement savings are already shored up and they have that much cash on a monthly basis, why not look for a much more affordable home as a vacation/rental/ or future retirement property?

They are spending it. They are also using it to save. Buying the house and going from $2k rent to $6500 mortgage will not allow them to save any for college or retirement. They know they will be house poor. So the bigger issue is the monthly expense not the 401k withdrawal for the house down payment. It's a hard call.

But they have to decide if they want to be house poor.

[disneysteve]

Buying the house and going from $2k rent to $6500 mortgage will not allow them to save any for college or retirement.

That makes what was already an awful idea far worse.

[Petunia 100]

They are spending it. They are also using it to save. Buying the house and going from $2k rent to $6500 mortgage will not allow them to save any for college or retirement. They know they will be house poor. So the bigger issue is the monthly expense not the 401k withdrawal for the house down payment. It's a hard call.

But they have to decide if they want to be house poor.

Do they know for certain that their particular 401k plan allows in-service distributions?

They will need to withdraw 225k in order to net 180k. The withholding is only 20% so only about half of the tax bill. How do they plan to come up with the other half next April? And then is your state one which will also take a piece of this?

[Petunia 100]

I recall there used to be first-time homeowner programs that allowed folks to borrow from retirement funds without penalties.
.

You can withdraw up to 10k penalty free from an IRA if you qualify as a first time homebuyer. Not from a 401k though.

[LivingAlmostLarge]

I actually told them that they will have to take our substantially more to cover the tax bill.

They lose the child tax credit and phase out of stuff.

[myrdale]

They lose the child tax credit and phase out of stuff.

Just the fact that you bring up child tax credit shows these people are broke. That sort of thing ideally be a bonus on top of your current finances, not something your budget depends on and you're relying on for a house payment (MOST particularly when you're buying a $1M house!!).

Be sure to update us in two years when the foreclosure proceedings begin, and I am curious to know how their future bankruptcy will go.