Buying a house and qualify for the 1st time homebuyers tax credit. Would like to know if I borrowed $8K from my 401K as part of the down payment would I be able to put it back into my 401K as a lump sum or would I need to make payroll deductions payments for a set amount of time in order to get it back in and working for me?
Unfortunately, the correct answer is: “ask your plan administrator.” There are no generalized rules for how these things work; it’s not even the case that all 401k’s allow loans.
401(k) regulations do not prohibit lump-sum repayment of loans, and the half-dozen plans I’ve participated in or administered have all allowed it. But individual plans don’t have to allow it (or loans at all); you’ll need to check your SPD (summary plan description) or contact the plan administrator directly.
What the above have said is all true.
Be careful, though.
Aside from that, be real careful to get this repaid pronto. With the tax implications, these loans are major expenses.
Also, should you lose your job before you get the credit in question, you’ve got a very short window to pay the loan back in full without paying the substantial tax penalty for early distribution.
What are the tax implications for using this to buy a home? I was told that it would cost me $8216 to pay back an $8000 loan from my 401K over a year. Are you saying this would be taxed as income or there would be tax implications as well?
If you miss your payment on the 401K, it can be taxed as income and with a nasty penalty.
However, if your plan works, all you’ll wind up losing out on is the actual interest on the loan as well as the interest the money might have earned you in your fund, and the tax-free nature of the interest your fund would have earned.
My post was meant to emphasize that your payment schedule accelerates from $684 per month to “Pay In Full This Month” should your employment situation change.
Thanks Mr. Slant, good info.
BTW, I borrowed $6K from my 401K to buy my house with.
I didn’t realize all of this stuff you learned in this thread, or I might have arranged another financing pattern to minimize the downside risk.
There are upsides to borrowing from your 401(k). Mine didn’t nearly tank as much as everyone else’s because I had some of it out in a loan. Also, when you do this, you are paying yourself interest, not a bank. The other side of it, though, is that the market might do better than the percentage that you’re paying yourself.
Since you’ve gotten good answers to your actual question, have you considered if it’s possible to directly monetize your tax credit toward the down payment, leaving the 401(k) out of it? I believe - unless it’s changed - that FHA lenders could monetize the credit toward additional down payment or closing costs as long as you met the 3.5% requirement. I don’t know if that’s possible with traditional non-FHA lenders.
I wasn’t sure that this was even a possibility since the tax credit is voided if you don’t stay in the home for 2 years. I just assumed that this is why the goverment didn’t just make it a down payment credit.
I’m going FHA even though I’m looking to put down 20% because the the seller has agreed to cover all closing cost (love this market, someone has to so it might as well be me) and FHA allows up to 6%; where as most conventional will only cover 3%.
Also, as Miamouse pointed out I can’t lose unless the market out performs the interest I’m paying and I could possibly even come out ahead if the market tanks. My specific job situtation looks fairly stable over the next three years so I’m not overly concerned about having to pay it back all at once.
Ok. I wasn’t arguing for it, just putting out an option to consider. It just seems simpler to not get your 401(k) involved at all if possible. Since you’re going FHA you could definitely apply your $8000 tax credit directly to your down payment. HUD authorized it for all FHA approved lenders. (that’s on the basis of you putting 20% down. The $8,000 is only being monetized as the additional down payment over and above the required minimum)