Explain to me why it's stupid to take $$ from a 401K for a down payment

[Anonymous]

Some people shouldn't give financial advice.

There is no tax penalty.

We borrowed from ours and paid it back with interest to ourselves in 5 years. Did it 10 years ago to pay off credit cards. Our 401K is healthy.

[Anonymous]

Depends on your situation. DH pulled out some for a buffer for the house we bought. We mostly had the down payment but anticipated needing more for closing and repairs. He has a stable gov. job and the repayment interest rate is next to nothing. Also, the house we bought is across from a new development that was just proposed last week. So, like other PP's, the money we will earn in property value increases will exceed the cost of withdrawing from the 401k.

[Anonymous]

401(k) loans can be for up to half a 401(k) account's vested balance or $50,000, whichever is less, without triggering tax penalties. 401(k) loans generally must be completely repaid within five years, though, meaning loan payments could be steep.

[Anonymous]

Anonymous wrote:There is no tax penalty; what are all the posters re tax penalty talking about?

There's not a tax penalty for a run-of-the-mill 401k loan that's borrowed and then paid back in due time. If you have a very stable job, I wouldn't even sweat it if you need the money.

The trouble comes when, for example, someone took a out a max $50k 401k loan and then soon lost their job. If that $50k isn't paid back into the 401k immediately, the IRS will classify this as a taxable distribution as well as assessing a 10% penalty for an early withdrawal. In the 25% bracket, the IRS would be expecting around $17,500 by April 15th the following year.

A number that big is basically insurmountable for someone who was already borrowing money from their retirement and now has a mortgage as well. I've seen it happen to former co-workers firsthand and it's not pretty.

[Anonymous]

Anonymous wrote:There is no tax penalty; what are all the posters re tax penalty talking about?

If you sell there is a 10% penalty and you have to pay income tax on it. Usually employers match 3% so that does help cover some of the penalty.

[Anonymous]

Anonymous wrote:Some people shouldn't give financial advice.

There is no tax penalty.

We borrowed from ours and paid it back with interest to ourselves in 5 years. Did it 10 years ago to pay off credit cards. Our 401K is healthy.

You should include yourself in that statement.

You are wrong. What you mean is that if you BORROW from your 401k there is no penalty. There is a penalty for taking money out and not paying it back, unless it is for certain reasons like the first time purchase of a home.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Some people shouldn't give financial advice.

There is no tax penalty.

We borrowed from ours and paid it back with interest to ourselves in 5 years. Did it 10 years ago to pay off credit cards. Our 401K is healthy.

You should include yourself in that statement.

You are wrong. What you mean is that if you BORROW from your 401k there is no penalty. There is a penalty for taking money out and not paying it back, unless it is for certain reasons like the first time purchase of a home.

Isn't that what PP described?

[Anonymous]

Even if you take it out for a home they're is penalty

[Anonymous]

Anonymous wrote:Even if you take it out for a home they're is penalty

No, there's not. Unless you don't pay it all back within the agreed upon timeframe (typically 5 years, but a TSP loan for home can be repaid over 15 years).

[Anonymous]

Anonymous wrote:Returns on 401k suck especially after fees. I would rather dump it and use the match to make up the penalty and taxes. Don't forget they will tax you later and tax rates always go up so you may lose even more in the future.

Not if you are ROTH.

[Anonymous]

There's no tax penalty, and you make back the interest that you are paying yourself. It's a bad idea if (a) you leave your job and have to pay it back in 90 days or (b) the market does better than your house in terms of appreciation

[Anonymous]

OP asked about "taking $$ from 401k for a down payment". That is a withdrawal, and there is a tax penalty.

It's perfectly fine to say "it's a lot better to take a loan and not a withdrawal because there's no tax penalty and the interest paid on the loan gets credited to your 401k" but people who make blanket statements about "there is no penalty" should be more careful.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Some people shouldn't give financial advice.

There is no tax penalty.

We borrowed from ours and paid it back with interest to ourselves in 5 years. Did it 10 years ago to pay off credit cards. Our 401K is healthy.

You should include yourself in that statement.

You are wrong. What you mean is that if you BORROW from your 401k there is no penalty. There is a penalty for taking money out and not paying it back, unless it is for certain reasons like the first time purchase of a home.

Isn't that what PP described?

She described borrowing but she also stated that there is no tax penalty for taking money out of a 401k. That's not true. If you don't pay it back there is a penalty, and if you do it because you've left an employer and you don't roll it over elsewhere -- effectively withdrawing it -- there is a penalty.

[Anonymous]

Anonymous wrote:Even if you take it out for a home they're is penalty

People really don't know what they are talking about here. This is not accurate.

1) you can take out up to $10k for the first time purchase of a home without a penalty. You do not have to pay this back.
2) if you borrow money from your own 401k and repay it, there is no penalty.

If you withdraw more than $10k or if you don't pay your loan back there is a 10 percent penalty IN ADDITION to paying tax on the withdrawal.

Everyone else, be careful that you know what you are talking about before you issue advice.

[Anonymous]

Anonymous wrote:Some people shouldn't give financial advice.

There is no tax penalty.

We borrowed from ours and paid it back with interest to ourselves in 5 years. Did it 10 years ago to pay off credit cards. Our 401K is healthy.

Calm down. The question is not limited to loans. There is a 10% percent penalty in early withdrawals from a TSP account, for instance, as I recall reading once. So one would pay automatic withholding (typically about 20 percent), additional withholding in anticipation of state taxes and being bumped, possibly, to a higher tax bracket. So IF there is a tax penalty for an early withdrawal, that plus everything else could amount to nearly 40 percent out. Taking a loan for a home from the 401k is generally a better idea.