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.

[Randomsaver]

You guys know I like retiring by 56. Any property I'm going to buy if I'm 48 should be somethign I can pay off by 56. Otherwise, I would have to extend working so it becomes a question of is it worth to work extra years for the property? $900K property is expensive for average Americans. iI would suggest them to look at something that they can finish payment by 56.

[myrdale]

$900K property is expensive for average Americans.

It is outrageously expensive for the average American.

The median household income in 2023 was about $80k. One rule of thumb is that a mortgage shouldn't be more than twice your annual gross income, which would be $160k. Considering the actual new home cost is closer to $300 to $500k, there are LOTS of people overextending themselves.

It was never discussed what the couples' actual income was. A $900k mortgage needs something in the realm of +$400k. How close are they to that?

[LivingAlmostLarge]

It is outrageously expensive for the average American.

The median household income in 2023 was about $80k. One rule of thumb is that a mortgage shouldn't be more than twice your annual gross income, which would be $160k. Considering the actual new home cost is closer to $300 to $500k, there are LOTS of people overextending themselves.

It was never discussed what the couples' actual income was. A $900k mortgage needs something in the realm of +$400k. How close are they to that?

The rule of thumb I think goes out the higher the income. You don't spend the same proportion of it. A lot becomes taxes and discretionary. I would guess around 3x for earning power with higher incomes. But that being said they make around $200k and the $720k mortgage. That's why it's tight. Like I said if they net $12k and spend 50% of it on the mortgage without any savings, the wife said that more than the 401k is what's making them nervous.

[Petunia 100]

So is there an update? What did this couple decide to do?

[LivingAlmostLarge]

Haven't seen her all summer in another month i'll ask. Thinking more I think taking out the money a bad idea because the monthly note is bad

[LivingAlmostLarge]

So I saw the friend and we chatted. She said they have a year to decide but she's leaning to no. For a couple of different reasons. First she was nervous about taking out $300k for a downpayment from a 401k. She didn't want to use all their retirement for the down. Second she said she knew already but they had been trying to live on the $6500-$7000/month mortgage payment for the house. It has been impossible for the past 2 months. She can't do it. Even cutting all activities, no retirement savings, etc, it still is really tight.

Third everyone keeps telling them to buy (except for me), and the moment they buy they can expand it. It's a 1400 sq ft 2 bd 1.5 bath home. They converted the 1 car garage to a bedroom for their son. and it's $900k which is a steal. On market it'd go for $1.5m what developers have offered. I told her the ideal thing would be to buy it and flip and sell it for $500k profit in a month, but she would be treating the landlord like crap since they could have just done it themselves and the landlady is giving them a deal to live there instead of a developer. It'd be bad karma but I guess technically they could do it.

Fourth - this is where they are. They realize that they need new jobs that pay more. Her husband wants her to work more but with his schedule it's hard. She could leave the school district and work more and make more but it works with the kids. In one year when her younger one is in middle school it'll be too late. But even then if she goes from $40k to $80k will it be enough to cover the increase in cost? And she asked me if that meant she would be able to catch up on savings and renovate the house? I told her truthfully no. I think that making more means losing some tax credits, you are going to pay more to make life easier. Then you still need to do a catch up retirement savings for what you take out for a downpayment. And you will need the house for 7 more years.

She admitted she looked and they could rent between $3-4k which is more manageble since they are getting a stellar deal of $2k/month now.

And yes I didn't point out that the way renters usually come out ahead is saving the difference between rent and owning say $2-3k/month into an account and investing it. But they didn't save it so they aren't ahead as renters.

The down payment would be $180k plus 10% penalty and taxes so like $275k-300k taken out. They are in the sweet spot of earning $150-$200k and this will push a much higher tax bracket and no child tax credit. It's a double whammy for a couple used only paying say $23k in federal taxes now owes $87k so about $64k federal plus 10% penalty you are looking at $300k to cover taxes and penalty for $180k down.

I am not sure if even getting new jobs it's still affordable tbh. I would say that they would make more but keep less, still take out the down from the 401k and then pay more taxes making more. The only thing is the monthly might be more affordable.