Will my mortagage penalty & interest offset my 401K withdrawal penalty and added income ?

Question

Well before I make the big plunge I am in need of some help and second opinions are always handy. I am buying a home and must pay 20K in prepayment penalties and another 17K in closing costs. To get the montlhy payment I can afford on a 440K loan I will need to withdrawl from my previous employers 401K plan. My plan is to pull out the minimum amount to cover the closing and to pay off car/visa debt that I am inheriting. If I pull out $40K (only 8K after tax) from my 401K how much will I need in mortgage interest & points to completely offset what is withdrawn from the 401K for the purposes to determine adjusted . The goal here is to NOT owe any fed/state tax. BTW I live in California. If I don't make this withdrawl for 1 I won't be able to afford the mortgage and secondtly I'll continue to pay up to 10% interest on the debt I've inherited. So if anyone has any brilliant ideas I'm all ears.

Answer 1

Personally, I think you are in over your head on the mortgage. If you take out money from your 401k, even though you are "paying yourself back" as people say, you are losing opportunity cost of the earnings you are not gaining on those dollars for the rest of your life. Is it worth it?

If you inherited debt (can't figure out how that would happen -- if someone died and left a debt, the estate would pay it or if there was no money in the estate the debt would be canceled by the company... they can't go after a dead person), you could just take out a non-secured loan, assuming your credit is good (which I assume it is since you are qualifying for a $440k mortgage) to pay off that debtor and then pay off that loan at a more reasonable schedule.

Answer 2

1. Inherited debt? Sorry, but there's NO SUCH THING! The estate is responsible for that, not you. And if there's not enough in the estate to pay off the debts, the creditor is SOL. Period!

2. If you're pulling $40k out of a 401(k) you're looking at tax on that plus a $4,000 penalty. Without knowing your tax bracket I can only guess that your tax bite might be. Let's say that your marginal rate is 25%. That will be $14,000 in tax. You'd need $40,000 + $16,000 (to offset the 10% penalty) over and above your standard deduction to wipe out any tax from the withdrawal. If you're Married Filing Jointly, that would add up to $66,300 in interest charges. That's more than double what the first year's interest would be on that loan at current market rates; you'd be looking at around $26,000 in interest in year one. In a 25% tax bracket, you're still looking at a $10,000 tax bill for the withdrawal.

3. If you're looking at $20,000 in prepayment penalties, you must be selling another home early in the loan. Not a smart idea there either.

4. You COULD roll the 401(k) over into an IRA and then pull $10,000 out of the IRA towards a first home and avoid the 10% penalty tax but that will only save you $1,000. But with the prepayment penalty, you're not buying a first home so that won't work either.

IMHO, there is NO WAY you can pull this together without taking a MAJOR BATH on taxes. You'd have to pull at least another $25,000 or so from the 401(k) in order to zero out the whole deal but you'd be using almost all of that to pay the taxes due. Not a very smart idea, especially when you consider the impact of the loss of your retirement funds to pull it all together. Time to either dump the whole idea OR lower your sights about $100k on the home price.

Answer 3

you may be able to offset the income tax on the 401k withdrawl but you will still be subject to the 10% early withdrawl penalty. the 401k is not eligible for an early withdrawl exception for first time homebuyers that is commonly allowed for ira's.. the irs specifically prohibits a taxpayer from rolling the 401k to an ira and then doing a withdrawl for first time home buyer. (this is done by prohibiting the rollover of the same funds more than once a year.)
that said........... i think you are potentially getting in over your head............ you have got to qualify for the loan based on your INCOME not what you can manipulate your income to be for this year or next....
i am not sure what the prepayment penalties you refer to ( is this the sellers prepayment penalties??? the closing costs sound very high generally closing costs are not nearly that high..17000 translates into nearly 4% of the purchase price sounds like its riddled with fees..
in todays real estate market you must be very cautious no one knows which way the next housing move whether up or down.

Answer 4

1. Prepayment penalties only apply when you PAY OFF a mortgage early, not when you BUY a house.
2. You can't 'Inherit' debt.
3. If you can't afford the mortgage without giving the IRS your 401(k), you can't afford the house PERIOD.
My 'brilliant idea' is to forget the house and find a competent financial adviser. NOTHING in this question is logical.

Answer 5

The vested quantity is what's yours. The unvested quantity is business company matching money which you haven't any longer earned yet - so which you do not get those. examine your 401(ok) plan precis description. once you're laid off, any unpaid own loan stability directly will become an early distribution project to the ten% penalty and earnings tax. With the the remainder of the $6500, you could withdraw it (and additionally incur the penalty + tax) or roll it over into an IRA.