Valued Contributor
Posts: 3,406
Registered: ‎12-19-2012
Re: Can savings come from 401k? or must be from "savings" account?
No! Don't make a withdrawal from your 401K! You will be heavily taxed for it!

You can take a loan from your 401K for a downpayment or savings. I am taking a loan from my 401K for savings, moving costs, and new furniture.

What you need to do is take out a residential loan NOT a general loan. A residential loan MUST be taken out before the closing date on your contract. A general loan has to be paid back in 5 years whereas as residential loan can be paid back over 20 years. To take out a residential loan on your 401K, you will need your Purchase and Sales Agreement, also known as your Contract and your signed promissory note.

You will need to request a residential loan through your online account or over the phone. They will send you a promissory note in the mail and when you get it, sign and date it then return it back to them with a copy of your signed Purchase and Sales Agreement. They will send your money out after approval which typically takes 5 business days.

You can take out up to 50% of its value. I got 3.25% interest on a 20 year loan that is only costing me $7 a week from my paycheck. There is no penalty for paying back early so I would take out a 20 year loan and pay it back in 10 years with additional funds after you get established in your new home. I plan to pay it back over 5-10 years. For the first 5 years, I am paying the minimum amount and then around the 5 year mark, my mortgage insurance will drop off the mortgage payment and I will be paying $346 per month less on the mortgage and I plan to use the $346 in savings to pay off my loan on my 401K faster. Your mortgage insurance should be removed when your loan balance is 78% of the original appraised value...that typically occurs after making your mortgage payment for 5 years.

Withdrawing from your 401K is horrible as the IRS will tax the amount you get by 40% and if you spend the amount that will be taxed, you will potentially owe the IRS a lot of money next year when you file. Plus when you withdraw, you get less money than if you took out a loan. Additionally, you lose out on capital gains on the withdrawn amount as it isn't going back in. As you pay your loan back, you earn capital gains on the money replenished on top of the money you have already been contributing through paycheck deductions.
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