Should I take my 401K money out to buy my first home?

Question

I know the answer should be "Absolutely Not" but here's why I ask. I currently rent a 2 bedroom apartment for myself, my wife, and my 2 boys (9 & 5 in age) in CA. The kids are getting to the age that they need more space. Renting a 3 bedroom apartment in the area where we currently live will cost an additional $250-$350 a month bringing our rent to $2200+. Rent continues to rise at a rate greater than my annual work raise, among other expenses, making saving money difficult. If I took $100K+from the 401K I wouldn't have to pay any early withdrawal penalty since the withdrawal is for a first-time home purchase. Yes, 20% is held for taxes. I am 34 and the company I work for matches contributions. I can grow the 401K with ease by the time I plan to retire. With a FIXED (not exotic) house payment, I'll be able to contribute at a greater percentage in future years. I need the large down payment to achieve an affordable mortgage. Advice, NOT SOLICITATIONS FOR BUSINESS, is appreciated.

Answer 1

Ok...there are all sorts of rent versus buy arguments. You've presented a valid reason to buy...rents increase but mortgages don't. And in most cases the rents increase faster than taxes. I'm not going to talk you into it or out of it..just giving you facts if you do it.

First, make sure you have access to that amount. Many companies do not allow hardship withdrawals on anything but what the person put in themselves. So the available amount may be far less than you think. But if you do have that amount available for hardship then move on to next statements.

You can, and will, incur a 10% early withdrawal penalty for withdrawing money from a 401k for a home purchase. That exemption from the penalty is for an IRA not a 401k. Anyone who says otherwise is wrong.

As for the withholding? If you buy your home early enough in the year the interest deduction should help get some of that back in the NEXT year. Assuming you don't change your withholding, you will likely get a refund next year. If the plan allows you to make a change to your percentage on a payroll by payroll basis, make a one time bump in your next paycheck 401k deduction to get it back that way...change the def % to 40% or whatever the tax refund % is as a portion of your check. Then change it back after the payroll. The more you can get back INTO the plan the better for your retirement.

But it's also an error that they will withhold 20% in taxes. This withdrawal (hardship) is not eligible for rollover so you can choose to have an amount withheld. It's 10% if you don't choose but you can choose zero or 30% if you want. But remember that the tax man cometh so I'd calculate my numbers carefully.

As for how much to take? Bottom line...if you're bound and determined to own and not rent then take the hardship withdrawal. You can exceed the amount that you need by the 20% AND the 10% penalty. Example: You actually need 70k down payment. You can take 92k. Then, per prior paragraph, have the 22k withheld for taxes. That way you're not suprised on April 15 and need to come up with additional 10k.

One last thing. If you take this withdrawal you will not be able to contribute to your plan for at least 6 months. So that will mess with your taxes too. If you have enough $$ in savings, you should increase your deferral percentage now so that you end up maximizing your match even with the six month's of zero deferrals. And, if it's possible, when you start back up...start up 2% higher than you had been deferring. If you take 100k out now you're devestating your account. You need to get growing again. You'll never fully recover...but at least you'll be able to get it going again.

Tread wisely....Do not be overly aggressive and think "Oh, I can save for this." Be realistic...there are a lot of costs associated with a home. Better to pay the tax man and get a pleasant suprise then be stuck next year.

Answer 2

Another option you might do the math on is taking a loan from it (which you have to pay back with interest...to yourself!), but you'll have to check California law on this.

The only real downside to withdrawing the money is that while the CA real estate market is hard to get into right now, and prices are growing consistently, that may not be the case in 15, 20 or 30 years, and you may find yourself with a property that is paid off, but worth less than half what the money would have been worth if you'd left it under a tax shelter...

Best wishes...

Answer 3

Hi Busted,

Legally you can withdraw the money (as you already know).

Have you considered getting an 80/20 loan from the bank? Find out how much PMI will be and weigh your options again. Brokers and lenders are usually very stingy with this information. When I bought my condo on the East Coast, PMI was cheaper than an additional loan.

Also, look into first time and moderate income programs. You bank can give you further info on these. Remember: Low income in California is much different from low income anyplace else in the world!

Finally, look into 100% financing. Washington Mutual offers a 100% loan with no PMI.

Answer 4

If you 401 k is performing and paying more than the 6 percent the bank is charging for your home loan.You already know the answer.Paying a little money now to sit down with a goof financial planner may be the way to go. When you find one let me know.
I am almost certain you will not use financial advise from this venue to base such important desisions.You seem much more inteligent than that. it just makes an interesting discussion.

Answer 5

I believe you can pull that money for a first home without penalty. It is always wise to invest in property rather than throw your money away on rent. Depending on the area you live in, the appreciation rate of investment on a house may be greater than your 401K, not tomention the tax benefit each year. I have investment properties that have gained 12% and 15% in the last year, in addition to getting back over $10,000 in tax refund last year which can be reinvested in areas such as IRA and other properties. Buying a home as opposed to renting is never a bad idea.

Answer 6

I said yes..!! because I did it

Here is why...

If you have enough down payment, you will then avoid paying mortgage insurance. However, there is penality in 401k. But you have to calculate two factors.

#1. Do you have enough cash? Is it necessary
#2. the money you take from 401k plus the penality and taxes in your case, is it worth covering the mortgage insurance.

Good luck!

Answer 7

you know the answer is no.
now what you haven't figured in is RISK.
job layoff, injury's, sickness, firings etc.
suggestion seriously is you get 2 more jobs part time your wife get extra job save and down size on slave cards, cable, cars then save real money. boys can hang together a few more years till oldest is 15. no it isn't cruelty.
lets them bond. we had 4 boys to a room.
visit daveramsey.com to learn what you don't want to learn the hard way. remember risk will find you on this equation.