Author Topic: Perspective needed old 401K - First Home  (Read 285 times)

GW

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Perspective needed old 401K - First Home
« on: August 25, 2020, 09:56:57 AM »
Hello Mustashians,

My wife and I (early 30's) live in a HCOL area and have been saving for a down payment on our first home. My wife has an old employer 401K ~$7,500 in it and we're considering paying the withdrawal penalty and rolling it into our home down payment. What are your thoughts on that? We're tired of renting and this could get us to our down payment faster. We signed a 10mo lease and can buy next year at this time. Looking for advice.

Breakdown:

We are Debt Free (Recently Dec 2019), no kids
Monthly Income - $7,500 ( We're putting money into the down payment fund and maxing our Roth IRA)
Renting/Bills/Expenses - $2,500/mo ($1,600 Rent 1bd, 1ba)

Current down payment savings: $22K

Old 401K possibly add to down payment: ~7,500

Other active Retirement accounts (401K, IRA, Roth) - ~$172K

Our plan was to get 40-50K down before buying, avoid PMI, and keep the loan smaller. The housing market where we are has not seen any effect from the current environment. Housing is in short supply and with rates so low people are still buying what homes are available. So many of our peers have bought homes with far less money down and housing prices out here continue to climb, meanwhile rent continues to go up.

(Punch me in the face if need be) Cheers

« Last Edit: August 25, 2020, 09:58:32 AM by GW »

kpd905

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Re: Perspective needed old 401K - First Home
« Reply #1 on: August 25, 2020, 10:21:54 AM »
Not sure what state you're in, but it looks like you'd pay 12% or 22% federal tax, 10% penalty, and then state tax on the withdrawal.  So you're probably down closer to $5,000 after paying all that.

Edit: As first time home buyers you should be exempt from paying the 10% penalty if you roll the 401k to a traditional IRA, then withdraw to use this as a down payment.  But you will still pay the federal and state tax.

Another option is to withdraw Roth contributions, which would be tax and penalty free.  However, you miss out on the tax free growth of 30 years of compounding.
« Last Edit: August 25, 2020, 11:02:28 AM by kpd905 »

Laura33

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Re: Perspective needed old 401K - First Home
« Reply #2 on: August 25, 2020, 12:59:44 PM »
No.  A house is a lifestyle item; your 401(k) is an investment to cover your future expenses.  Don't give Future You the shaft so that Current You can inflate your lifestyle. 

You have many, many options available to you; the 401(k) just looks like the easiest.  Save up for longer.  Get a loan with a smaller downpayment and pay PMI until you can get rid of it.  Do a piggyback loan (standard 80% loan with a 10-15% piggyback loan/HELOC to cover the difference).  Buy a cheaper place that needs more work and do it up over time as you can afford to.  Etc. 

Also:  why are you investing in Roths and not traditional IRAs/401(k)s?  If you put your money into the traditional (tax-deductible) versions, that will save you on taxes, which will in turn free up more money right now that you can put toward the downpayment. 

GW

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Re: Perspective needed old 401K - First Home
« Reply #3 on: August 25, 2020, 01:51:37 PM »
Quote
Also:  why are you investing in Roths and not traditional IRAs/401(k)s?  If you put your money into the traditional (tax-deductible) versions, that will save you on taxes, which will in turn free up more money right now that you can put toward the downpayment.

We do, I have a traditional 401K through my employer that I put 6% into get the company match.

My wife's current employer doesn't offer a 401K so we contribute to the Roth.

The traditional IRA has my 3 previous jobs 401Ks moved into it and I manage that account.

I also contribute a good chunk of money into an HSA pre-tax. So the $7,500 income a month is what's left over after all the pre-tax accounts.

The rest of the money goes into saving for our down payment and the Roth
« Last Edit: August 25, 2020, 01:55:56 PM by GW »

mlipps

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Re: Perspective needed old 401K - First Home
« Reply #4 on: August 25, 2020, 02:01:47 PM »
Do either of your current 401k's allow for a downpayment loan? 50% of the balance up to $50k is pretty common. Mine lets me take that loan with a 30 year term. There's some debate about whether you incur double taxation by doing this (because you pay back the loan with post tax dollars, then pay taxes when you withdraw), but it's worth considering if you're really fixated on buying a place.

zolotiyeruki

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Re: Perspective needed old 401K - First Home
« Reply #5 on: August 25, 2020, 02:03:18 PM »
It sounds like withdrawing the $7500 would only accelerate your home purchase by a few months at best.  Doesn't seem worth it.

ericrugiero

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Re: Perspective needed old 401K - First Home
« Reply #6 on: August 26, 2020, 08:38:26 AM »
The difference it will make is relatively small because $7500 isn't much money in the big scheme of things.  But, I think it's a bad idea in general.  Keep your retirement money invested and working for you. 

Roll the old 401K into your current 401K or IRA so everything is combined and simpler.  Continue to save up for your down payment.  After taxes and potential penalty you would only add around $5-6K.