Author Topic: Question about Roth withdrawal and selling an underwater house  (Read 3582 times)

ENL

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So, my family is relocating to another city due to my husband's job.  I have quit my job and we are trying to sell our house.

Other important facts:
1. Being recently converted mustacians, we had a very small emergency fund to work with and it is mostly gone now from paying to get the house fixed up to a salable condition
2. Having bought our house near the peak of the housing market, we have little to no equity.  We owe about as much money to the bank as we can hope to sell for, which means that after commissions and closing costs we will need to bring money to the closing when it happens.
3. I have a sizeable 401k from the employer  I just left and the 401k has some Roth funds in it.  The plan is administrated by Vanguard. 

I would like to take a withdrawl of the the Roth contributions in my 401k to help pay off my underwater mortgage at closing.  I'm lead to believe that as long as I only withdraw my Roth contributions I will not be subject to a penalty.  However, I was poking around on my Vanguard site and started (but did not send) a distribution request from my 401k to see how it was handled on the site.  It appeared that if I were to take a distribution, 10% would we withheld.

Is this because the Roth funds are in a 401k as opposed to a Roth IRA?  If so, can I roll my 401k over to an IRA and take out the contributions without a penalty that way?

Or is the Vanguard website misleading and I could actually withdraw from my Roth contributions from the 401k directly without a 10% penalty?

Are there other thoughts on a better way to handle this financial situation?  I hate pulling money out of my retirement fund, but it's the only way to get the money I would need and the house is pretty much a sunk cost at this point.
« Last Edit: August 23, 2014, 10:52:59 AM by Evil Number Lady »

matchewed

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Re: Question about Roth withdrawl
« Reply #1 on: August 23, 2014, 03:41:23 AM »
http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-on-Designated-Roth-Accounts#rollovers

See the examples in the link. I think the "Bob" one pertains to your situation. In short you should attempt a rollover to a Roth IRA by having the 401k company send you a check, and take some of your contributions while putting the rest into a new Roth IRA. I haven't looked at this particular scenario and the tax implications but I don't see a penalty with it.

Disclaimer about not being a tax attorney and all that.

Also I would highly recommend trying anything but looting your retirement accounts. You may say it is the only way but sell some stuff, sell cars and buy cheaper ones, pick up another job, if it's not too much to cover the gap can you borrow from someone...

Good luck.

ENL

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Re: Question about Roth withdrawl
« Reply #2 on: August 23, 2014, 08:55:45 AM »
I was hoping to do a direct rollover on my 401k when it was time because it has Roth and traditional assets in it.  I'm not certain enough to feel comfortable knowing how to determine the exact amounts I would have to deposit into a roth or traditional IRA to avoid converting my funds.  Is taking the check myself the only way to avoid the 10% penalty or can I still do what I want with the direct rollover?

We are hoping that we will be able to cover the difference other ways, but I am skeptical that even with some finagling we can cover the whole difference ourselves.  In the previous year we have already done lots of purging of our "stuff" so that we could be more aggressive about our student loan debt (which is now paid off, yay!)

The only somewhat sizable asset that might be able to go is one of our two cars.  However, the nicer of our two cars was a gift from my parents and selling it would be something that they would consider unforgivable.  The other car is a junker that we don't really need as much, but at the same time is not worth very much either.

The amount we need to bring to closing is going to be somewhere between $4000-$7000, I expect.  Begging our family for a loan (which at our current saving rate I know we could quickly pay back) is our first option at this point, and if that doesn't work we are just going to throw the money we do have at it and make up the difference with the retirement fund.

May not even be an issue if our house sells for more than we expect or it sits on the market long enough that we are able to replenish our emergency fund in the meantime.

frugaliknowit

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Re: Question about Roth withdrawl
« Reply #3 on: August 23, 2014, 09:16:13 AM »
I would not use roth funds to cover an underwater house.  Take out a cash advance from your cc if you have to, then pay it back.

ENL

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Re: Question about Roth withdrawl
« Reply #4 on: August 23, 2014, 09:40:04 AM »
That's a good idea.  I'll check to see if my credit card has that option.

matchewed

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Re: Question about Roth withdrawl
« Reply #5 on: August 23, 2014, 10:31:50 AM »
TBH it sounds like you're just not ready to sell the house. Being worried about scrambling to make up the difference kind of points that you're moving too quickly on this and you should take your time to be prepared for it.

ENL

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Re: Question about Roth withdrawl
« Reply #6 on: August 23, 2014, 10:48:51 AM »
matchewed,

To clarify, we only make a moderate income and in the year or so we have had since reading this blog and started to make better financial decisions we have been able to wipe out all our debt aside from the mortgage (which is great)  but not enough time to build up as large an emergency fund as we would like or start investing anything beyond the normal 401k amounts.  So are we prepared for something like this?  No.  But at this point there is not much to be done about it except trying to do better in the future.

Sitting on the house longer for us to be "ready" is not really going to help.  We are not selling a house as an investment strategy, we live there currently and are relocating so we can no longer live there.  Luckily we have family that is willing to put us up in the city we are moving to so we can avoid paying rent and mortgage at the same time.  They, however, are only willing to do this under the assumption that we are actively trying to sell our house and will move out in a reasonable timeframe once we do. 
« Last Edit: August 23, 2014, 11:19:36 AM by Evil Number Lady »

ENL

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Re: Question about Roth withdrawal and selling an underwater house
« Reply #7 on: August 23, 2014, 10:53:56 AM »
BTW, I changed the title to reflect that we are also talking about selling my house.

BlueHouse

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Re: Question about Roth withdrawal and selling an underwater house
« Reply #8 on: August 23, 2014, 11:04:29 AM »
Has husband asked his company about relocation expenses?  Companies often want the employee in the new location quickly and they want the mind focused on the job rather than on selling the house.  So a clear discussion about it not being good timing due to the house value taking a hit during the last downturn may make the company throw in another 7-10k for moving expenses.  Depends on the situation, but if this move in any way benefits the company, then they should put some money up to make it happen on their timeframe.  OTOH, if this is just convenient for you to move closer, then I wouldn't rock the boat by asking. 
Good luck and congratulations on making so much progress in the past year.  That's really impressive!

ENL

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Re: Question about Roth withdrawal and selling an underwater house
« Reply #9 on: August 23, 2014, 11:10:35 AM »
Husband's job is a new one after a brief period of unemployment, not a transfer.  So the new employer is not going to be kicking in anything for moving costs, since it would have been just as easy for them to hire someone locally.  The job in a new city was necessary since my husband's job prospects in the current city were very slim.  The move, once it happens, will be good for us.  We plan to move somewhere within walking distance of his workplace as his old 40 minute commute was killing our budget.  And having family nearby will greatly reduce our babysitting costs.  :-)
« Last Edit: August 23, 2014, 11:14:59 AM by Evil Number Lady »