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

[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.

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.

And Roth versus nonRoth could make a difference.

[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.

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.

To be honest the employer match helps makeup the 10% penalty so it's really only about 7%' You do have to pay taxes regardless if you take it out now or in the future. If you save your own you already paid taxes.

[Anonymous]

Anonymous wrote:It's not totally stupid. It's more of a robbing Peter to pay Paul situation. If your job is super-stable, I really don't see a problem with it. The only thing you're missing out on is a positive return on the principle borrowed, but if the market dipped while you had the loan out you're actually buying back in at cheaper prices, which could create a situation where you make money by having the loan out. This scenario would be total luck, btw, so don't be planning on it.

The huge negative is that if you quit, change jobs, or are fired, the full amount of the loan remaining is due to be paid back immediately. If it's not paid back to your 401k in full, it's considered taxable income + a penalty might be tacked on as well. Getting fired while having a big 401k loan out can be financially devastating.

A house is the only thing I've ever suggest taking out a 401k loan for. Folks get into trouble when using 401k loans as continually revolving lines of credit and then never getting ahead as a result.

This is brilliant, solid advice. There's a grasshopper and the ant feel about touching your 401k. It is important to prepare for your future, and safeguard against allowing current needs (or wants, like rushing to buy a house when you could do it without touching your retirement if you saved for another year). But, this PP is spot on, providing a strong sense of what your process should be when thinking about making such a move.

[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.

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.

To be honest the employer match helps makeup the 10% penalty so it's really only about 7%' You do have to pay taxes regardless if you take it out now or in the future. If you save your own you already paid taxes.

The "employer match" is YOUR money. It doesn't reduce the amount you pay.

[Anonymous]

Anonymous wrote:

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.

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.

To be honest the employer match helps makeup the 10% penalty so it's really only about 7%' You do have to pay taxes regardless if you take it out now or in the future. If you save your own you already paid taxes.

The "employer match" is YOUR money. It doesn't reduce the amount you pay.

True but if you withdraw, the match didn't come from your investment so it is extra money that will go towards paying the 10% penalty.

[Anonymous]

Anonymous wrote: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.

Ahhhh, thank you for breaking it down. I'll rephrase one of my answers above pertaining to a 401k loan as this:

It would be so stupid to straight-up take money out your 401k, pay the 10% early withdrawal penalty, and then pay the income tax on the distribution, that I hadn't even considered someone would be dumb enough to do it. You could be losing 30%+ of your own hard earned money on a terrible financial decision in the heat of the moment over a house down payment.

I automatically assumed that we were talking about a loan here...which would be totally fine if you had a stable job. Just be aware of the consequences if you happened to no longer hold that job that your 401k loan originated through.

[Anonymous]

I will muddy this entire discussion even further by pointing out that while it is typical for 401k loan balances to become due within 60 days of employment termination, that is not the case for all plans. Some will allow you to continue making monthly payments to them if you do not roll your 401k to a new plan. You should check with your employer.

[Anonymous]

Some people over save and end up paying major taxes when they retire on their 401k. At least if you dump your 401k into your house you get a 500k no capitol gains. It's funny my Asian relatives think it's silly to use 401k and buy many houses as investments because they think that the 401k is too restrictive and get left holding the bag when the rich investors cash out during down turns. At least with houses you can rent them out and always produce income. 401k is hyped up bs that the investment companies push.

[Anonymous]

Anonymous wrote:We dumped half or ours before 2008 and bought a new house in 2011, best decision ever, our equity is double what we took out including penalties

Since $1 invested in an S&P 500 index fund on January 1, 2009 would have grown to $2.60 as of December 31, 2014, "best decision ever" seems like a stretch. You appear to have traded 160% growth for 100% growth. Oops.

[Anonymous]

Anonymous wrote:I will muddy this entire discussion even further by pointing out that while it is typical for 401k loan balances to become due within 60 days of employment termination, that is not the case for all plans. Some will allow you to continue making monthly payments to them if you do not roll your 401k to a new plan. You should check with your employer.

And to further muddy the waters, some Plans (and I believe this is Plan-specific, not an IRS rule) don't permit new contributions until an outstanding loan is paid off. So if you pay the loan back over 5 years, you are missing those 5 years of contributions as well, both as to long-term appreciation and annual tax benefits. It's very important to have a clear understanding of both IRS rules and Plan rules when making this decision.

[Anonymous]

One more thing to consider: if you take a loan and are applying for a mortgage, you have to disclose the payment which impacts your overall debt load.

[Anonymous]

Anonymous wrote:

Anonymous wrote:We dumped half or ours before 2008 and bought a new house in 2011, best decision ever, our equity is double what we took out including penalties

Since $1 invested in an S&P 500 index fund on January 1, 2009 would have grown to $2.60 as of December 31, 2014, "best decision ever" seems like a stretch. You appear to have traded 160% growth for 100% growth. Oops.

Unrealized growth that you can't use! Don't forget you still will be taxed on that gain.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:We dumped half or ours before 2008 and bought a new house in 2011, best decision ever, our equity is double what we took out including penalties

Since $1 invested in an S&P 500 index fund on January 1, 2009 would have grown to $2.60 as of December 31, 2014, "best decision ever" seems like a stretch. You appear to have traded 160% growth for 100% growth. Oops.

Unrealized growth that you can't use! Don't forget you still will be taxed on that gain.

You won't be taxed on the gain for your home.

[Anonymous]

i lost my job and had a loan wasnt the end of the world they gave me about 8 months to pay up. i paid 20K took a hit on 5k minimal damage and penalty

[Anonymous]

Anonymous wrote:Some people over save and end up paying major taxes when they retire on their 401k. At least if you dump your 401k into your house you get a 500k no capitol gains. It's funny my Asian relatives think it's silly to use 401k and buy many houses as investments because they think that the 401k is too restrictive and get left holding the bag when the rich investors cash out during down turns. At least with houses you can rent them out and always produce income. 401k is hyped up bs that the investment companies push.

Let's be honest. Most people in the USA are not over saving for retirement, they are way under saving.