IRA / 401(k) Withdrawal as Down Payment on Home

[BigMoneyJim]

As I understand it I can take $10k withdrawal with no penalty from my IRA or 401(k) to use as a down payment on a house. (A first home as defined by the IRS.)

If I have both a 401(k) and an IRA, can I take $10k from each penalty-free for a total of $20k down payment? (probably too much to hope for...)

[samclem]

Jim,
I don't know the answer to your question, but I know the answer to a related one: If you have a ROTH IRA you can withdraw anything you put into it (after 5 years I think) without penalty. You can't withdraw gains, just your contributons.

Now, back to your question and an informed answer from someone--else . . .

[crazy connie]

You can withdraw from the IRA for a 1st home. The 401K depends on the rules they have at the employer but they are usually loans which must be repaid. Borrowing from retirement money rarely makes good financial sense.

[Lusitan]

Quote:

Originally Posted by BigMoneyJim As I understand it I can take $10k withdrawal with no penalty from my IRA or 401(k) to use as a down payment on a house. (A first home as defined by the IRS.) If I have both a 401(k) and an IRA, can I take $10k from each penalty-free for a total of $20k down payment? (probably too much to hope for...)

I haven't looked into options for making a home-purchase withdrawal from an IRA, but I know you can take a LOAN from your 401(k) plan for a down-payment on a home. The loans usually require that you start paying them off immediately (I think you get to choose over what timeframe) and I think if you leave your plan you are obligated to pay off the loan in full (so be careful if you think your employment situation is not stable or if you plan to take a long time to pay off the loan).

In general, I agree with what most people say in that it's not usually a good idea to make a withdrawal from your retirement accounts to pay for anything else. But we took a loan from our 401(k) plan to make a downpayment on our home, and we paid it back quickly (less than a year I believe) and also continued with our 15% contributions to the plan, so it worked out OK in our case. We were just in a spot where we needed cash on-hand, but we weren't overextending ourselves.

[Martha]

You can withdraw from your IRAs up to $10,000 without penalty to purchase a home. You will owe taxes on the money. There are some restrictions. For example, this is a once in a lifetime exclusion. The Fairmark site gives a good rundown of the rules. http://www.fairmark.com/rothira/first.htm


There is no similar withdrawal rule for 401ks. Instead, employers can allow their employees to borrow money from the 401k plan. The employer can restrict borrowing or not allow it at all. If your former employer allows borrowing to buy a home, you should be able to both borrow from your 401k and take a distribution from the IRA. But pay the loan back! And you won't be able to deduct the interest.

[clifp]

If your employeer allows it borrowing from a 401K is a good approach. You don't pay any taxes on the money you withdrew, the interest you pay goes directly back into your 401K account balance, and you can continue contributing toward your 401K.

There a number of caveat especially if you lose your job, you will often have to pay back your loan quickly. Banks may treat the money you borrow from your 401K as borrowed funds for down payment purpose, which could increase your mortgage interest rate.

[BigMoneyJim]

Okay, it looks like I'm limited to $10k from my IRA. I don't think I can take a loan from my 401(k) as I don't work for that company anymore.

I'm still not working, so I may have the opportunity to use $10k for a home this year and not have it affect my marginal tax rate. It's just in the idea phase for now, though.

Thanks!

[Martha]

Quote:

Originally Posted by BigMoneyJim Okay, it looks like I'm limited to $10k from my IRA. I don't think I can take a loan from my 401(k) as I don't work for that company anymore. I'm still not working, so I may have the opportunity to use $10k for a home this year and not have it affect my marginal tax rate. It's just in the idea phase for now, though. Thanks!

Not to say anything that may encourage you from borrowing from your 401k, but even though you don't work there anymore you still may be able to borrow from your plan. I faced that issue a few years ago with a former employee and it turned out that she did have the right, as did our current employees, to borrow money to buy a home. Look at your summary plan description.

[clifp]

Quote:

Originally Posted by BigMoneyJim Okay, it looks like I'm limited to $10k from my IRA. I don't think I can take a loan from my 401(k) as I don't work for that company anymore. I'm still not working, so I may have the opportunity to use $10k for a home this year and not have it affect my marginal tax rate. It's just in the idea phase for now, though. Thanks!

Ok I realize that I am probably stating the obvious, but why the heck would you want to borrow money from any source to buy a home when you don't have a job?!

[BigMoneyJim]

Quote:

Originally Posted by clifp Ok I realize that I am probably stating the obvious, but why the heck would you want to borrow money from any source to buy a home when you don't have a job?!

Well, I would have a job before I bought. I'm just thinking ahead a bit. Since I'm not working part of this year my overall income will be lower, so paying the taxes on withdrawn tax-deferred funds potentially won't be as expensive as it would be in a year I worked all 12 months.

If I don't buy a house, there is a similar low-tax opportunity in converting part of my IRA to a Roth.

On borrowing from the 401(k), I may or may not have the opportunity to borrow from it based on several factors like plan rules at my old 401(k) and possibly plan rules at my future job's 401(k) depending on where I want to keep the old funds.

[jazz4cash]

Quote:

Originally Posted by Martha Not to say anything that may encourage you from borrowing from your 401k, but even though you don't work there anymore you still may be able to borrow from your plan. I faced that issue a few years ago with a former employee and it turned out that she did have the right, as did our current employees, to borrow money to buy a home. Look at your summary plan description.

We've discussed before, there's lots of variation in 401k plans. I know our plan says loans must be repaid from payroll, so that would be determining factor for an ex-employee. Also don't forget the age 55 withdrawal following seperation.

I guess most here realize a 401k Loan is not a loan at all........assets are liquidated to fund the withdrawal. I think nearly all 401k loans work that way. A young co-worker learned the hard way by missing out on a pretty good year for equities in '06. If the assets are earning 10% per year (or whatever), thats the real cost of the "loan". There ought to be more accurate terminology for these transactions.

[spideyrdpd]

Also depends on what % of your money 10k is. You can rebalance or like me keep all your money in stocks. The 9% is like having a bond of fixed interest.