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20% Tax on using old 401K for downpayment?

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Wavester64
Valued Contributor

20% Tax on using old 401K for downpayment?

Long story short, I currently have (2) 401ks. One from a previous employer, and the other from a current employer. I am currently shopping for to purchase a home because my current landlord is getting ridiculous with raising rent. I had planned on taking the downpayment for the home from the old 401k. However I am being told (and I have read) that taking money out of that 401k, I am subject to 20% tax (ouch Smiley Mad) is that correct? Is there any way around that (legally of course), or getting that 20% lowered at all?

 

For those about to ask why I didn't initially move the $ from old 401k to an IRA, to me it was doing well even without contributing, so I just let the money stay in there and grow.






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Message 1 of 7
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DakotaM
Regular Contributor

Re: 20% Tax on using old 401K for downpayment?

I'm assuming this is a pre-tax (not Roth) 401(k)? In that case, it would get taxed at time of withdrawal at whatever your marginal tax rate is. I think the 20% is standard withholding from 401(k) distributions. If your tax rate is less than that though, you would get the difference back once you file taxes. I don't know if you can adjust the withholding amount on the front end though. The good news is that home down payments are one of the exceptions to get around the additional 10% penalty for non-retirement withdrawals.

 

Also, though this doesn't help your current situation, you can roll the old 401(k) balance into your current 401(k) too. Assuming of course that the current one has decent investment options compared to the old one. 



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Message 2 of 7
GreatLife
Regular Contributor

Re: 20% Tax on using old 401K for downpayment?

I can attest that @DakotaM is correct. An addl option is moving your old 401K funds to the current 401K, then take a home purchase 401K loan. Rate will be marginal, you decide the term length (I think max is 20 years?), payments including interest are applied into your 401K account. If at some point you can't or won't repay then the outstanding balance would become taxable income for year the loan defaults. No prepayment penalties. And 401K loans don't report to CB's.

 

 

Message 3 of 7
CreditCuriosity
Moderator Emeritus

Re: 20% Tax on using old 401K for downpayment?


@GreatLife wrote:

I can attest that @DakotaM is correct. An addl option is moving your old 401K funds to the current 401K, then take a home purchase 401K loan. Rate will be marginal, you decide the term length (I think max is 20 years?), payments including interest are applied into your 401K account. If at some point you can't or won't repay then the outstanding balance would become taxable income for year the loan defaults. No prepayment penalties. And 401K loans don't report to CB's.

 

 


Yes take a loan you have to pay back interest I believe that goes to you but a way better way of going.

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Message 4 of 7
Realist
Contributor

Re: 20% Tax on using old 401K for downpayment?

I dont understand the old 401k option,  either you pulled it out or you rolled it over.  It's likely an either or option as 401ks are timestamped to do something with.  If you rolled it over, you are solid.  Most often, 401k want you to withdraw after termination, or roll over, not keep an accumulated status.    If you pulled, put your hand on a checks, etc, you will pay taxes plus 10% to secure the remaining balance.

 

With that said, understanding the numbers to your financials are nothing more than a legal accounting trick.  Numbers on a ledger, nothing more.  If you have a 401k worth a value, you do have an option to take out to utilize against a home purchase.  There are thousands of online financial calculators, so if you plug numbers, you should know if it makes sense to pull out, and place the money as a down payment.  At the end of the day, you ultimately are paying yourself back at the elevated interest rate.

 

Now....  What do we consider an elevated interest rate?

 

It's no secret the stock market has been boasting a solid 20-40% parabolic gains recently.   Like a repeat, and shadow repeat that mimic the 1930's, what goes up, should it only go up, or must all up eventually come back down?  Sometimes taking something off the table makes sense.  Knowing when to maneuvear is the difference between ok, and excellence.  There is a time and place for EVERY situation.  You either capitalize on it, or you miss it.  I'm at the crossroads that I willfully place a palabolic 20-40% gain on the back burner, for a guaranteed 5-8% gain.  I know how this eventually plays out.  History doesn't repeat, but it often rhymes.   2001 recession.   2008 great recession.   20XX - what's the next cycle in the pattern?  We are living out the greatest bubble of our lifetime.  

 

 

 

 

 

 

 

 

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Message 5 of 7
IsambardPrince
Established Contributor

Re: 20% Tax on using old 401K for downpayment?


@Wavester64 wrote:

Long story short, I currently have (2) 401ks. One from a previous employer, and the other from a current employer. I am currently shopping for to purchase a home because my current landlord is getting ridiculous with raising rent. I had planned on taking the downpayment for the home from the old 401k. However I am being told (and I have read) that taking money out of that 401k, I am subject to 20% tax (ouch Smiley Mad) is that correct? Is there any way around that (legally of course), or getting that 20% lowered at all?

 

For those about to ask why I didn't initially move the $ from old 401k to an IRA, to me it was doing well even without contributing, so I just let the money stay in there and grow.


Emptying out the 401(k) to "buy" a house is bad.

 

If you can't afford a down payment without ruining your retirement account, I would say that buying a house is out of reach. But the banks will love you. I have enough to put down a 10% down payment even in this economy, even in Chicago, without touching the 401(k) and I still won't do it.

 

I could raid the 401(k)s and easily come up with another 40% or so and I still won't do it.

 

See, the thing that going into bankruptcy years ago taught me (along with never ever living like that again) is that there's some places you can store money that the creditors or a trustee normally can't touch, but if you raided that for a down payment and disaster strikes later, you have no money that the creditors can't touch.

 

As with most things in this country, the IRS not applying the penalty tax for "home down payments" is another scam to clean you out in my book.

 

Even if you pay off the house, you'll have spent more money than renting, and now you're old and something will come up and you'll "reverse mortgage" and the bank will get it back at a steep discount anyway, or Medicaid will.

 

It's almost impossible to structure mortgages into a winning deal. I just don't go there.

 

Depending on where in the country you're in, the taxes and insurance have gotten to be more expensive than the mortgage. In Florida, apparently, 25% of people who paid off their house have had to drop their insurance and pray that the next hurricane doesn't get them.

 

They tried to stop climate change by passing a law stripping the term from the compiled statutes, but insurance companies aren't going for it I guess.

Message 6 of 7
AzCreditGuy
Valued Contributor

Re: 20% Tax on using old 401K for downpayment?

Yup this is true .....Man talk about a pickle I was in. I had a 4k loan on my 401k and decided I wanted to move my money into a Crypto IRA that I had set up, I was goning to move 80% and 20% I was going into my personal account, they advised thet would take the $4k away from the 20% since I still owed on the loan and further tax the 20% I would be getting at 20%. Which would have put more into pentaly and taxes, so I decided to pay back the loan in full and only get pentaly/tax on the 20% I was going to get. 

 

 

Message 7 of 7
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