There is a thread from November, 2007 on this topic, but I wanted to see if anything had changed.
My wife and I are going through the process of getting a mortgage. We’re thinking of withdrawing money from the 401k to use as a down payment. It is my understanding that there are no penalties for this, but it is still considered taxable income. Is this correct? This is our first house, does that change anything?
Thanks for the advise.
I think a lot of the details depend on the specifics of your 401k plan. You need to get the plan details from your company.
You didn’t ask, but I think this is a poor time to be withdrawing from the stock market. Remember the adage about buying low and selling high? Getting out now is selling low. But it’s also a good time to buy a house, and if you need the savings, it may be a worth it despite the capital losses you’ll be taking.
I did not have to report the money I borrowed from my 401(k) as income in 2007, but it was specifically a loan: I have to pay it back. I don’t know about straight withdrawals.
I was just coming in to add this and saw that Skammer beat me to it: my loan repayments do come from after-tax deductions.
Yes, any money you take out of your 401(k) plan before the age of 59.5 will be taxable income. The fact that it is for the purchase of your primary residence means you should not have to pay any additional penalty, but you still will owe normal income tax on the withdrawal.
You should also account for the fact that you will be depleting your retirement savings by not only the amount you withdraw, but by any future earnings on that amount as well. These lost earnings may be offset by the growth in the investment you are making in your house; and maybe they won’t.
I’ll mention that many 401(k) plans also let you borrow money from your plan as a loan that is repaid through deductions from your paycheck, typically up to ten years for the purchase of a home. Money borrowed this way is not taxed, although the loan repayments are taxable.
I did this. Here’s the deal:
As Pleonast said, what you can do and the rules for doing so will depend on your 401(k) plan – not just the mutual fund/investment company that it’s with, but the specific plan set up by your employer.
Some plans allow you to borrow from your account. This is a loan that you have to pay back, but the money just goes back into your account and purchases are made according to whatever allocation you have set up. So, it’s possible you could borrow low and pay back high, or it could be the reverse. With some plans you cannot make your regular contributions until the loan has been paid back in full.
For plans that allow withdrawals, there are probably rules about what the money may be used for – buying a house is almost always allowable. The withdrawal will be taxed as regular income. Keep in mind, this money could bump you into a higher tax bracket for that year, or subject you to the Alternative Minimum Tax. In addition, contrary to what others have said here, I *did *have to pay a 10% IRS penalty for early withdrawal from the plan.
So, contact your HR benefits office and find out what is/isn’t allowed for your plan, and then crunch those numbers to see if it’s going to be worthwhile.
Thanks again. Unfortunately, the 401k is the only money we’ll have for a down payment. I have a second 401k, which we’re not touching. Is there any special paper work I need to fill out, so that I don’t get penalized? Oh… it will be a withdrawal, not a loan.
Hold on a minute!
401k distributions are still subject to the 10% penalty, even if used to put money down on a house. Only IRA distributions may be exempted from the penalty for this purpose. You might be able to roll the 401k over into an IRA in order to avoid the penalty (I did when I bought my house), but this is one of those cases where it makes a big difference.
In addition, only amounts up to $10,000 will be exempt from the penalty, even if the account is an IRA.
Also, do not forget about other effects the additional might have on you. I just finished an amended return for a client who not only paid extra tax on her distribution, but she lost education credits and a deduction for student loan interest because her income was now too high for those deductions/credits.
Agreed. Pay attention to the change in income effected by the bump from a lump-sum withdrawal. If it is substantial, your tax bracket may change.
Be sure to have enough money withheld from your withdrawal for taxes.