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Use 401K to buy house for cash?

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  • Use 401K to buy house for cash?

    CH7 discharged in Nov 09
    Doing a ride through with the house, as it is worth about 15K less than owed. But for now, we need to stay here. Our plan, is to walk from the house in a couple years unless the values recover which we doubt.

    I have a 401K and am contributing through payroll deduction with employer matching contributions. My thought is to continue this process, and then in about 5 years do a withdrawal to pay cash for another home. (my plan allows withdrawals for primary residence).

    I realize we would not have our 401k for retirement, but we also would not have a house payment either. We are currently 47 years old, so there would be time to stash cash for retirement after the withdrawal, and no mortgage.

    Other than the tax penality, do you all think this is a terrible plan? I don't want to be one of those that retire with a mortgage payment hanging over their heads. To me, going into retirement with a 401K balance, and a grand mortgage payment monthly does not make sense if it can be avoided. Also, I expect property values to still be low in about 5 years. (I would love to be wrong)

    So please share your thoughts on this plan for the future.

    Thank you for your time.
    8-07-09-filed Chapter 7
    11-18-09-DISCHARGED!!

    Life is not what challenges you face, but how you face those challenges.

  • #2
    The tax penalty makes it a terrible plan. There is no way you come out ahead on this deal.

    At a minimum, you wait until you retire and then simply "pay off" the mortgage at that time, but it would be stupid to do an early withdrawal to buy a house pre-retirement age.

    Comment


    • #3
      HHM is right. Horrible plan. I see that you have considered that there is a 10% penalty, but that's not all; when you withdraw from your 401k, it is considered taxable income in that year and will likely put you in a higher tax bracket. I did taxes a few years ago for a couple with a high income who also withdrew a sizeable amount from 401k. The entire amount of the 401k was taxed in the 28% bracket + 10% penalty + 4.63% Colorado tax. Thats 42.63% !!!!!!

      Comment


      • #4
        Good point HHM. In 5 years we will be 52 years old, so only another 7.5 years and I can withdrawal that money tax free.

        So perhaps a mortgage until 59.5 would be better and then pay off the mortgage with the 401k would be best all around.

        Thanks for your imput.
        8-07-09-filed Chapter 7
        11-18-09-DISCHARGED!!

        Life is not what challenges you face, but how you face those challenges.

        Comment


        • #5
          Originally posted by JoeBankrupt33 View Post
          HHM is right. Horrible plan. I see that you have considered that there is a 10% penalty, but that's not all; when you withdraw from your 401k, it is considered taxable income in that year and will likely put you in a higher tax bracket. I did taxes a few years ago for a couple with a high income who also withdrew a sizeable amount from 401k. The entire amount of the 401k was taxed in the 28% bracket + 10% penalty + 4.63% Colorado tax. Thats 42.63% !!!!!!
          Joe, you are correct. I was only considering the 10% penalty and did not consider the 25% or so on top of it for taxable income, all before counting state.

          OUCH!!

          Thanks for your imput. You have a very good point. 25%+ is not a place I want to visit.
          8-07-09-filed Chapter 7
          11-18-09-DISCHARGED!!

          Life is not what challenges you face, but how you face those challenges.

          Comment


          • #6
            [QUOTE=NoMoreCards;371411]Good point HHM. In 5 years we will be 52 years old, so only another 7.5 years and I can withdrawal that money tax free.

            QUOTE]

            FYI, you will never be able to withdraw 401K money or traditional IRA funds tax free. That's the benefit of both of those plans, contribute pre-tax dollars and let the money grow, then withdraw it in retirement and pay tax then, hopefully when you are in a lower tax bracket.

            You would avoid the the penalty if you waited until after 59 1/2.
            Wife Laid off - 11/16/2009 Missed First Payments - 12/5/2009
            Filed Chap 7 - 12/31/2009
            341 - 2/12/2010
            Discharged - 4/19/2010

            Comment


            • #7
              After 59.5 years of age, you can make a 401k withdrawal without the added 10% penalty added.

              Then you are only liable for the taxable income, not the early withdrawal penalty.
              8-07-09-filed Chapter 7
              11-18-09-DISCHARGED!!

              Life is not what challenges you face, but how you face those challenges.

              Comment


              • #8
                You may want to look into whether or not it makes sense for you to use your 401k to loan you the money needed. Many 401k plans have an option where you can use the funds to make a loan to yourself which is then repaid to the fund over a period of years, sometimes via an automatic paycheck deduction. You even get an interest deduction on your taxes for the interest you are paying into your 401k. You do have to be careful with that sort of program and play by the rules to make sure that the IRS does not come in and recharaterize the loan as a distribution where you owe taxes plus the penalty.
                The opinions above are not and should not be considered legal advice or establish an attorney/client relationship. In addition, I have no knowledge of any confidential facts, am not a debt relief agency, and probably don't have the right to practice in your jurisdiction anyway ... so, please talk to your own attorney.

                Comment


                • #9
                  As stated, never a good idea.....even the loan. Here is what I would do. Start a ROTH 401K right now. Take what you were going to put into the 401K extra to do this and put it into that. Use that as the vehicle to invest in good mutual funds. Save from now until 59 1/2 and then pay for a retirement home in cash. You'll be saving post-tax dollars and pay no tax on the money at 59 1/2 because you will have it in there for well over the 5 year statute. You will be paying the taxes on the money as you go (coming out of your paycheck like normal).

                  For the next three years, you can put $5,000 a year. When you hit 50, you can do $6,000 a year.

                  Let's say you do exactly that. At age 59 1/2 when you are ready, according to my calculator (I used a moderate 10% return on the mutual funds, the stock market has averaged 12% a year over it's history) you would have about $145,000 tax free, also known as a nice retirement house! If the market only does 8% you still have $129,000. You should be able to still find a nice house for that. If yhings go back to the 12% average, you get a $172,000 house.

                  I have every intention of starting this myself at age 40. By then, my salary will have doubled and it will not be an issue to budget the $416 a month for this. Since I will have a few extra years starting at 40 instead of 47, mine will be worth $275,000 at 8%.....$348,000 at 10% and $442,000 at 12%. I plan on having this house I am in paid off by then as well (it will be paid off right at age 60 even if I run the entire loan) and therefore I will have a house that is worth probably $400,000 plus by then in addition to this ROTH and my work retirement. I have this all planned out!
                  New Orleans: Home to the World Champion Saints, the biggest enviromental disaster and the biggest natural disaster in the history of this nation. Proud to call it home!

                  Comment


                  • #10
                    LSU, I don't agree that there is never a time to borrow from your 401K to purchase a house.

                    I was putting 10% of my income into a 401K, 5% into a RoTH and 11% into a company funded fund. A total of 26% of my income into retirement.
                    I decided to max out my 401K and use that as my savings to buy a house via a loan.
                    Reasoning: I cannot save enough to buy a house and max out my 401K at the same time. That extra 10% I am putting into my 401K is before taxes so 25% more goes into the 401K than what I could save. When it comes time to buy a house I will borrow from my 401K and pay myself interest and on top of that I have doubled my 401K contributions as I pay myself back my retirement will grow bigger than if I were to only contribute 10% to my 401K and save for a house using a savings account.

                    Also, I will be able to borrow more from my 401K than I would have in savings to lower my loan to value which in turn will also save in PMI or a lower 2nd mortgage. My price range for a home is around 500K so I will most likely be over 80% loan to value.

                    Logan

                    Comment


                    • #11
                      Originally posted by Logan View Post
                      LSU, I don't agree that there is never a time to borrow from your 401K to purchase a house.

                      I was putting 10% of my income into a 401K, 5% into a RoTH and 11% into a company funded fund. A total of 26% of my income into retirement.
                      I decided to max out my 401K and use that as my savings to buy a house via a loan.
                      Reasoning: I cannot save enough to buy a house and max out my 401K at the same time. That extra 10% I am putting into my 401K is before taxes so 25% more goes into the 401K than what I could save. When it comes time to buy a house I will borrow from my 401K and pay myself interest and on top of that I have doubled my 401K contributions as I pay myself back my retirement will grow bigger than if I were to only contribute 10% to my 401K and save for a house using a savings account.

                      Also, I will be able to borrow more from my 401K than I would have in savings to lower my loan to value which in turn will also save in PMI or a lower 2nd mortgage. My price range for a home is around 500K so I will most likely be over 80% loan to value.

                      Logan
                      One problem with that. After you take the loan, you will have a LONG period of time in which if you lose your job that loan will become payable or you will have to cash it out. Which means a 10% penalty plus your tax rate. I agree that this is a horrible idea if you put it into a savings account because the savings account will earn nothing. I never suggested that.

                      I assume you are doing this to earn the company match, which I get. However, as stated above you run a horrible risk of losing big time (40% of your money after taxes and penalties) and most places limit the amount that you can take in a loan. Above that, you will have to have the loan payments deducted from your paycheck which will hurt your monthly income. To me, it's far too much risk for the small difference that it will make due to the matching.
                      New Orleans: Home to the World Champion Saints, the biggest enviromental disaster and the biggest natural disaster in the history of this nation. Proud to call it home!

                      Comment


                      • #12
                        Originally posted by LSUTiger32 View Post
                        One problem with that. After you take the loan, you will have a LONG period of time in which if you lose your job that loan will become payable or you will have to cash it out. Which means a 10% penalty plus your tax rate. I agree that this is a horrible idea if you put it into a savings account because the savings account will earn nothing. I never suggested that.
                        If I lose my job it will be via a furlough which changes nothing as far as my 401k is concerned--been there done that . Also, I will have an emergency fund and/or I could refinance the house to get the cash to repay the 401k if I the need arises. I will not buy a house until all my other debt is paid off so the only loan will be the home.

                        Yes, the loan will be deducted from my monthly income but I will also return to 10% contributions to my 401K so I will be bringing home more money than I am today. Also, I am not planning on buying a home for at least 11 months and should have a substantial pay raise by then so I may be able to continue maxing out my 401K and paying down a 401K loan.

                        Logan

                        Comment


                        • #13
                          How about an alternate plan?

                          Save down payment money in a non-retirement account for the next 5 years, while contributing enough to the 401k to get the full match.

                          In 5 years, age 52, buy a home with a nice down payment on a 15 year mortgage. Pay regular payments for 15 years.
                          Retire at age 67 with a paid for home and your retirement savings intact.

                          In the mean time enjoy life and exercise, so when you retire you feel like enjoying it.

                          Comment


                          • #14
                            Originally posted by Logan View Post
                            If I lose my job it will be via a furlough which changes nothing as far as my 401k is concerned--been there done that . Also, I will have an emergency fund and/or I could refinance the house to get the cash to repay the 401k if I the need arises. I will not buy a house until all my other debt is paid off so the only loan will be the home.

                            Yes, the loan will be deducted from my monthly income but I will also return to 10% contributions to my 401K so I will be bringing home more money than I am today. Also, I am not planning on buying a home for at least 11 months and should have a substantial pay raise by then so I may be able to continue maxing out my 401K and paying down a 401K loan.

                            Logan
                            You got it all figured out then. No way you could lose your job other than a furlough which makes you different than 99.9% of Americans I guess. No one I know of, regardless of their job is that safe. You got schemes for everything though, so roll on with them.
                            New Orleans: Home to the World Champion Saints, the biggest enviromental disaster and the biggest natural disaster in the history of this nation. Proud to call it home!

                            Comment


                            • #15
                              Originally posted by LSUTiger32 View Post
                              You got it all figured out then. No way you could lose your job other than a furlough which makes you different than 99.9% of Americans I guess. No one I know of, regardless of their job is that safe. You got schemes for everything though, so roll on with them.
                              The only other way I could lose my job is to get fired. If that happens I have bigger problems because it means I probably just killed someone.

                              Why are you always so negative?

                              Comment

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