Author Topic: Using a QDRO for a down payment on a home  (Read 755 times)

alexabreana

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Using a QDRO for a down payment on a home
« on: June 15, 2022, 10:07:02 AM »
Hello,

I recently got divorce, I am looking to use my ex-401k QDRO (Qualified Domestic Relations Order) money for a down payment on a home, I know that using the QDRO will  exempt you  from paying penalties but would still need to pay for taxes.  Wondering if anyone here as used a QDRO for a down payment on a home? Pros and cons?

Kristina

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Re: Using a QDRO for a down payment on a home
« Reply #1 on: June 15, 2022, 01:19:51 PM »
I don't know much, but I was on the donating end of a QDRO once.

Things I might think about:

Depending on what kind of housing market you are buying into, the down payment may be a large number.  Since you're probably now filing taxes as a single, the tax rate on taking that down payment from what is essentially your 401(k) could be quite high - maybe even 24% federal plus whatever your state's top rate is.  I would consider putting down the smallest down payment that is reasonable so as to minimize the tax rate on this maneuver.  It may even pencil out to pay PMI to avoid the income taxes on the QDRO.

I don't know how old you are, but you'd be spending from your retirement funds for part of a house.  You need a place to live, sure, and if kids are involved they need a place as well.  But if you do take a chunk from your retirement, don't shortchange future you too much, or keep in mind you'll have to rebuild that somehow.

With the way interest rates and the economy are going, I think it's possible that house prices will be stagnant and maybe even decline over the next six months.  My son is also perhaps in the market for a house, and while I'm not exactly advising him to wait, I will be advising him to consider that factor in deciding when to buy.

I don't know if there are timing restrictions on when a QDRO is penalty-free, but it sounds like you've done a bit of research on it already, so I'd keep that time frame in mind.  It would be a bummer for the timing window to be 6 months, you buy a place 7 months later, and have to pay the early withdrawal penalty.

Dicey

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Re: Using a QDRO for a down payment on a home
« Reply #2 on: June 22, 2022, 10:49:41 PM »
Hmmm, this might be a good time to be a renter. The market is teetering and inventory is rising as people try to chase the market. You might save enough by waiting to cover a year's rent.

Something to understand thoroughly are the ramifications of borrowing money that's tied to your employment. Are you stuck there until the loan is repaid? I did a 401k loan (not a QDRO) as a bridge between properties and was shocked at how trapped I felt. I absolutely hated every minute of that loan.