Whats Fair When it Comes to Taxes?

[saden1]

Originally Posted by firstdown

You may want to read the rules again. Its a hardship rule that allows the use of 401s for a down payment or last resort funding. Pay back is 5 to 30 yrs and can be as little as 60 days. I'll stand by my statement.

Rules for 401k Withdrawal for Home Purchase

The first rule of 401k withdrawal for home purchase is that you must be able to prove to the Internal Revenue Service (IRS) officials that you are going through a financial hardship. Secondly, you should be able to prove that it is your last resort of fulfilling your financial need. You should not have any other funds available, that could suffice your financial needs. Thirdly, you are not allowed to withdraw anything above your financial need. Meaning, if you are required to make a down payment of $10,000 and you cannot arrange for own contribution, then you are allowed to withdraw only $10,000 from your 401k account (provided you have enough balance in it.). The fourth rule is that you should have executed all other options of taxable loans, so that 401k withdrawal is your last option of raising funds for home purchase. After your withdrawal, you cannot contribute to your 401k account for a span of 6 months.

How to Purchase a Home Using a 401k Withdrawal

The 401k regulations explicitly state that 401k withdrawal can be made only for a purchase of a first home. You cannot use this money to make a down payment for your second home. The money withdrawn from 401k is taxable. One important thing to remember, while applying for early 401k withdrawal is that, although the law permits the early withdrawal from 401k, it is not mandatory for the employers to offer such a provision in their plan. Hence, inquire with your human resources department, to know the provision in your individual plan. Also, beware of the penalties you are subjected to, upon the withdrawn amount. A study of IRS regulations, regarding 401k withdrawal for home purchase, may give you a clear idea regarding the taxes and penalty for early withdrawal of 401k funds. At times, you may notice that after paying taxes and penalties, you are only left with considerably less amount than your exact need. Hence, you might anyway have to arrange for funds to cover up the difference.

Implications of 401k Home Purchase Withdrawal

Withdrawing from your 401k funds is definitely not the wisest of all options. For one thing, you lose out on a large sum from your retirement funds, which can make your post retirement life less than secure. You unnecessarily have to bear the burden of taxes and penalties. Besides, you lose out on interest that would have incurred on the withdrawn amount. Hence, you should choose this option only when all the other doors have closed. Borrowing against 401k account may seem to be a good alternative, as it is free of tax and penalties. Besides, the interest accrued from your loan goes back to your account. The repayment span may be anywhere between 5 to 30 years. However, if you lose your job, you will have to repay the loan in as little as 60 days. Failure on your part may lead to penalties and taxes. The loan amount will be then considered as an early withdrawal.

Thus, you should weigh your options wisely, and choose one which can secure your future while still sufficing your current need. Hope this article on 401k withdrawal for home purchase was resourceful.
By Ashwini Kulkarni Sule

What exactly is your statement? People don't pay back the money they from their 401k? You shouldn't take money from your 401k to buy a home?


There are two ways to buy a home with money from your 401k, a) hardship withdrawal which is a taxable event along with a 10% penalty if you are under the age of 59.5 or b) borrow up to 50% from your 401k investments. Like you mentioned hardship withdrawal is a last resort because of the cost associate with it and most people don't go that route. Additionally, before you can do a hardship withdrawal you must first borrow the maximum allowed from you 401k and that's what people typically do. Now if you're borrowing money for the sake of buying a car, the money has to be paid back within 5 years, if you're borrowing money to buy a home the law allows you to payback the money within 10 years or longer. Utlimatly what's available to you is determined by the employer's plan so not every 401k plan is the same. Some plans won't let you borrow, some won't let you contribute while you have an outstanding loan. Some allow for repayment flexibility, others don't.

You are right in that the balance is due within 60 days if you lose your job. This is a risk people should be aware of before they jump in. Then again, if you lose your job you may have other issues to worry about than a 10% penalty. For me it wasn't much of a risk because I have huge amount of money in stock options that I could tap into at any point and easily pay back the loan. I could have sold those options but I choose not to because, well, my stock option value tripped since that time.

Bottom line, don't take distribution from your 401k, borrow from it....401k borrowing is a financial instrument that should be used wisely. Just like anything else in life, you aught to know the risks. If people can't pay it back, that's their own retirement money they are cannibalizing.


Here's a study on the issue:
http://www.rand.org/pubs/working_pap...RAND_WR799.pdf

[firstdown]

Originally Posted by saden1

What exactly is your statement? People don't pay back the money they from their 401k? You shouldn't take money from your 401k to buy a home?


There are two ways to buy a home with money from your 401k, a) hardship withdrawal which is a taxable event along with a 10% penalty if you are under the age of 59.5 or b) borrow up to 50% from your 401k investments. Like you mentioned hardship withdrawal is a last resort because of the cost associate with it and most people don't go that route. Additionally, before you can do a hardship withdrawal you must first borrow the maximum allowed from you 401k and that's what people typically do. Now if you're borrowing money for the sake of buying a car, the money has to be paid back within 5 years, if you're borrowing money to buy a home the law allows you to payback the money within 10 years or longer. Utlimatly what's available to you is determined by the employer's plan so not every 401k plan is the same. Some plans won't let you borrow, some won't let you contribute while you have an outstanding loan. Some allow for repayment flexibility, others don't.

You are right in that the balance is due within 60 days if you lose your job. This is a risk people should be aware of before they jump in. Then again, if you lose your job you may have other issues to worry about than a 10% penalty. For me it wasn't much of a risk because I have huge amount of money in stock options that I could tap into at any point and easily pay back the loan. I could have sold those options but I choose not to because, well, my stock option value tripped since that time.

Bottom line, don't take distribution from your 401k, borrow from it....401k borrowing is a financial instrument that should be used wisely. Just like anything else in life, you aught to know the risks. If people can't pay it back, that's their own retirement money they are cannibalizing.


Here's a study on the issue:
http://www.rand.org/pubs/working_pap...RAND_WR799.pdf

Your last post said it was smart to use your 401 then I showed the rules that its only to be use as a hardship use. My point was if your that hard up its probably not the best time to buy a home.

[saden1]

Originally Posted by firstdown

Your last post said it was smart to use your 401 then I showed the rules that its only to be use as a hardship use. My point was if your that hard up its probably not the best time to buy a home.

I told, most people take out a loan and there is no need for a hardship withdrawal. I said to you can't conclude the wisdom of it without knowing an individuals circumstance. Not everyone is in the same boat and I gave myself as an example. You don't have to be hitup for money to take money from your 401k.