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rross
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Message 1 of 5
4 REPLIES 4
cdtotten
Established Contributor

Re: Can 401k be used to satisfy conditions?

I'm not going to comment regarding your conditions question, but I will say this. Taking a withdrawl or a loan from your 401(k) to finance the purchase of a house is a horrible idea. If you have to take the funds from there, then you can't afford the home in the first place. If it is a withdrawl, you are not only going to pay taxes on the distribution, but also a 10% penalty in addition to any distribution fees. A $5,000 distribution for someone in the 20% tax bracket would net them only $3,500.. not to mention the money you won't be making on those funds over the life of your retirement fund (compounding tax free). If it is a loan, same horrible reasoning. The funds will not be in your account earning returns, you will be double taxed... because you are taking out pre-taxed money and paying it back with post-taxed money. Finally, if heaven forbid you lost your job for any reason, the loan would be called due immediately (usually you have 3 months to pay it all back), and if you cant... forced disbursement that will be subject to withdrawl taxes and penalties.

 

Please don't do it... it will be a decision you regret for a long time.


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Message 2 of 5
Walt_K
Senior Contributor

Re: Can 401k be used to satisfy conditions?


@cdtotten wrote:

I'm not going to comment regarding your conditions question, but I will say this. Taking a withdrawl or a loan from your 401(k) to finance the purchase of a house is a horrible idea. If you have to take the funds from there, then you can't afford the home in the first place. If it is a withdrawl, you are not only going to pay taxes on the distribution, but also a 10% penalty in addition to any distribution fees. A $5,000 distribution for someone in the 20% tax bracket would net them only $3,500.. not to mention the money you won't be making on those funds over the life of your retirement fund (compounding tax free). If it is a loan, same horrible reasoning. The funds will not be in your account earning returns, you will be double taxed... because you are taking out pre-taxed money and paying it back with post-taxed money. Finally, if heaven forbid you lost your job for any reason, the loan would be called due immediately (usually you have 3 months to pay it all back), and if you cant... forced disbursement that will be subject to withdrawl taxes and penalties.

 

Please don't do it... it will be a decision you regret for a long time.


I think you may be overstating the downside of taking out the 401K loan.  A person should consider it carefully and weigh the risks, but you'd have to compare the costs of taking the loan out to the alternatives which could include having to finance more in the mortgage, PMI, etc.  The main cost of the 401K loan is foregoing the potential gains you could be earning while the money is in your 401K (although I would have like a way to forego the -20% I recently "earned").  There's a risk of losing your job and having to take a further penalty if you can't pay it back in time like you mention. 

 

The double taxation thing is overstated. The only part that you are paying taxes on twice is the interest that you are paying to yourself to pay back the loan.

http://www.mymoneyblog.com/double-taxation-and-the-real-reasons-401k-loans-are-bad.html 


Starting Score: ~500 (12/01/2008)
Current Score: EQ 681 (04/05/13); TU 98 728 (01/06/12), TU 08? 760 (provided by Barclay 1/2/14), TU 04 728 (lender pull 01/12/12); EX 742 (lender pull 01/12/12)
Goal Score: 720


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Message 3 of 5
mamahearts
Frequent Contributor

Re: Can 401k be used to satisfy conditions?


@Walt_K wrote:

@cdtotten wrote:

I'm not going to comment regarding your conditions question, but I will say this. Taking a withdrawl or a loan from your 401(k) to finance the purchase of a house is a horrible idea. If you have to take the funds from there, then you can't afford the home in the first place. If it is a withdrawl, you are not only going to pay taxes on the distribution, but also a 10% penalty in addition to any distribution fees. A $5,000 distribution for someone in the 20% tax bracket would net them only $3,500.. not to mention the money you won't be making on those funds over the life of your retirement fund (compounding tax free). If it is a loan, same horrible reasoning. The funds will not be in your account earning returns, you will be double taxed... because you are taking out pre-taxed money and paying it back with post-taxed money. Finally, if heaven forbid you lost your job for any reason, the loan would be called due immediately (usually you have 3 months to pay it all back), and if you cant... forced disbursement that will be subject to withdrawl taxes and penalties.

 

Please don't do it... it will be a decision you regret for a long time.


I think you may be overstating the downside of taking out the 401K loan.  A person should consider it carefully and weigh the risks, but you'd have to compare the costs of taking the loan out to the alternatives which could include having to finance more in the mortgage, PMI, etc.  The main cost of the 401K loan is foregoing the potential gains you could be earning while the money is in your 401K (although I would have like a way to forego the -20% I recently "earned").  There's a risk of losing your job and having to take a further penalty if you can't pay it back in time like you mention. 

 

The double taxation thing is overstated. The only part that you are paying taxes on twice is the interest that you are paying to yourself to pay back the loan.

http://www.mymoneyblog.com/double-taxation-and-the-real-reasons-401k-loans-are-bad.html 


I agree with you there.  Once we close all we'll have are my husband's student loans and the mortgage because for the past 7 years, we have put all of our extra $ into paying off our accounts.

 

The money I'm saving in interest over the life of my loan, locked in at 3.75% fixed 30 years FHA vs 5% or more is enormous compared to the 10% penatly and 15% (my tax bracket) tax that I will have to pay upfront.  Meanwhile, my husband is increasing his contribution to his 401K because I won't have to repay a hardship withdrawal (not the same as a loan) back and I won't be able to contribute to my 401K for 6 months.   All in all, it's a sound investment for us.  Consider your own situation and make the best decision you can make based on your own needs. 

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myFICO EQ 652 9/26
Message 4 of 5
203bravo
Established Contributor

Re: Can 401k be used to satisfy conditions?

well said --

 

but to answer your original question... the loan processor will not care which account the money sits in so in savings, checkings, or 401(k) it's all the same to them.. there is no harm in moving the money.  the only possible flag will be if you need the entire amount in your 401(k) to qualify and then when you make your withdrawal they will by law withhold 10%.. so would that 10% be the difference in you having enough in reserves to qualify or not.. if not then there would be no foul in taking the money.

 

Just remember to save enough that come April you can pay uncle sam --- and your state if you have state income taxes as well.

 

best of luck.

Message 5 of 5
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