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 
) 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.
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.
@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
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.
