Pros and cons of pulling money out of a 401K for a down payment on a house.?

Question

Im looking at buy a first home and need a lump sum. What are the pit falls of withdrawing a large sum from a 401K account?

The amount would be 20K, not huge,but enough.

Answer 1

Upside: If you need additional money to make down payment, or buy appliances (washer/dryer, refrigerator, etc.), it is very helpful, and saves getting an additional loan. The money is interest free, but you will have to pay taxes on it. This is because 401K is normally accrued from your salary on a pre-tax basis.

Downside: This money comes in the form of a loan from your retirement plan and must be repaid. It is lost money towards retirement, but you also will not accrue any new retirement funds until the loan is fully repaid.

Answer 2

There is a penalty for withdrawing early, then you will pay regular tax on the amount you take out. So, if you take out $50K, you probably will get $25K and the rest will end up in Uncle Sam's pocket.

Would you consider delaying your plan? US housing market is going through a correction. If you wait for a few months, you will be able to get 10% or 15% off, which means you don't need to touch your 401K.

In addition, it doesn't really make sense to stop an investment that is doing well and put it into something that is about to fall.

http://money.cnn.com/2006/09/08/real_estate/caught_in_the_bubble/index.htm?postversion=2006090814
http://money.cnn.com/2006/09/05/real_estate/Ofheo_home_prices/index.htm?postversion=2006090514

If you don't plan to delay your plan, then consider taking a bigger loan then taking out your 401K. Interests on loans are tax deductiable (not free, only used as deduction), which is better than panelties you have to pay to IRS for early withdraw.

And please interview several and pick a good realtor or agent.

Bad ones will talk you into buying the largest property at your credit limit. Good ones will find you a good deal (Sellers are offering discount and incentives now).

Try to stay away from Adjustable Mortgage, because 30 year fix mortgage rate is very low right now. There is no reason to use Adjustable loans except fatter commission for loan agents.

Interests only loans are not good iether. Mortgage payment consists of two parts: interests and principal. Interests are like rent, which doesn't add to the equity to your house. It simply disappear as your pay it. If you want to use interests only loans, might as well rent, especially during market downturn, because housing price won't appreciate.

Finally, for tax benefits, talk to your CPA or tax accountant. Do not consult finance with realtors or agents. They get commissions when you sign the check!

This is a good article for negotiation price: http://biz.yahoo.com/brn/060909/19463.html

Answer 3

My parents did this. You would need to find out what the penalties are for early withdrawal from your 401k. You also need to be sure of the taxes that you will have to pay on the money. Also, because of this, my parents got audited by the IRS because of the sudden jump in income, even though they reported the income and the reason for it. It sends up a red flag to the IRS. I would suggest that you contact the company that you have the 401k through and get information directly from them. Be sure to carefully read and understand everything before signing anything. I would also suggest talking to another person who is not part of that company, such as a tax professional or accountant.

Answer 4

The pitfall is you will be more screwed on taxes than you think. I did something similar without consulting a tax professional, and I can tell you I was royally screwed... not just with penalties, but with that lump sum being added to my yearly income threw me in the highest tax bracket and I paid dearly. Please don't make my mistake and consult a certified public accountant or tax professional before you do anything.

Answer 5

It depends if you can get the money back in the account in 59 days. (it is 60) but be careful. If not, the fees 10% and the Taxing will kill you. If you are using a documented loan, they will know your source of funds and wonder about this.
Just thinking out loud, but maybe just maybe you can get another loan (HELOC or 2nd or even a car loan) in time to pay back the IRA in 60 days.

Answer 6

Economic outlook of is of importance. If the interest rate
is going to be steady for the forseable future it is always
better to take repayment mortgage on variable interest.
If you are in UK ' Which ' advice is good to follow. I have
always followed 'Which' and it has never let me down.

Answer 7

payin the taxes on the money that you free up.