Bonus paycheck for downpayment - Loan or deposit?

[joshall]

So, I am not sure whether this board is the right place to post this. But this is something to do with the amount of cash needed for mortgage downpayment.

So we will receive bonus pay soon. But as many of you would know, almost > 45% of it will be subjected to federal & state taxes, social and medicare. I am wondering whether it is wiser to have 100% rolling into the 401k, then loan it out? 401k loan has a very low interest rate, with no penalty and is not subjected to tax because it is not considered as withdrawal.

We had initially planning to use some 8k from the bonus pay towards the downpayment.  We can't really be losing almost 4k due to taxes and social/ medicare.

Any opinion would be appreciated!  Thanks.

[MarineVietVet]

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@joshall wrote:

So, I am not sure whether this board is the right place to post this. But this is something to do with the amount of cash needed for mortgage downpayment.

So we will receive bonus pay soon. But as many of you would know, almost > 45% of it will be subjected to federal & state taxes, social and medicare. I am wondering whether it is wiser to have 100% rolling into the 401k, then loan it out? 401k loan has a very low interest rate, with no penalty and is not subjected to tax because it is not considered as withdrawal.

We had initially planning to use some 8k from the bonus pay towards the downpayment.  We can't really be losing almost 4k due to taxes and social/ medicare.

Any opinion would be appreciated!  Thanks.

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Hi there.

I went ahead and deleted your duplicate post.

[frugalQ]

you have to consider what your company's 401k loan policy is.  in the case of my employer, we can only take out up to 50% of 401k balance.  so, although you will keep all of bonus, you may only be able to access a portion of it.

[joshall]

Same here- we are only allowed 50% as well.  But that is not really much of a difference considering we will lose almost 50% too, due to tax and social/ medicare.

[frugalQ]

i agree...i just wanted to point it out just in case you were thinking that the full bonus will go towards downpayment.

it makes sense to put in 401k and then get the loan out.  however, you will also need to keep in mind the fact that you may not be able to use 401k balance as reserves if you pull the full 50% of your vested balance out as a loan.

just giving you things to think about.

[joshall]

Hi Frugal,

Yes, I am also aware of that. But thanks again for making the points! But I won't probably max it all out!

Even though I am only able to take out 50%, the remaining 50% will still grow in the account. I think that makes another valid reason to do this.

[frugalQ]

another plus is the interest you pay on the loan will be paid back to you.  the gains you would make on the loan balance if you didn't take out the loan may be greater than what you pay back in interest, but in my opinion, using the funds to purchase a home is well worth it as you hope to recoup the gains throgh the appreciation of the house.

good luck!

[ezdriver]

Six of one and one-half dozen of the other. Flip a coin. I'd use the post-tax cash to make the downpayment.