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

[Anonymous]

Is is just a tax penalty issue? Or bad for retirement security? Both?

[Anonymous]

Huge tax penalty plus you're losing compound interest. If you need to touch your retirement to buy a house, you can't afford the house.

[Anonymous]

you loose whatever gains your money would make in your 401K. over time, it adds up to a lot with compound interest. also, if you leave your job and have to repay the loan you took from your 401K, you suddenly have a big bill to pay. at least if you borrow from TSP you ahve to reapy. I'm not sure about 401(k).

[Anonymous]

Both, but the severity of each depends on your circumstances. How old are you? Is it financially favorable to buy now instead of continue to save cash? Run some numbers OP. We did it. The only thing we weren't accounting for is that the extra "income" bumped us into AMT territory, so check that too.

[Anonymous]

If you take a loan from your 401(k) there is no tax penalty.

We took a 401(k) loan for a portion of our down payment and paid it back over 5 years at 4% interest. The downsides are (1) the money is not in your pool of retirement money, which maybe is making more than 4%, (2) your paychecks are smaller because your employer deducts the monthly payment, (3) if you change jobs, you have to pay back the loan.

I don't consider the 4% interest a downside since the interest is being earned by your retirement account. It's like taking money from one pocket and putting it into the other.

We decided to do it, but kept the total loan on the smaller side.

[Anonymous]

You can get a loan of up to $50K from your 401k. In some circumstances, it might make sense to take the loan and use as downpayment. You're paying the loan interest back to yourself, and there is no tax penalty (but you want to make sure your job is secure, because you'll have to pay it all back immediately if you get canned.)

But if you're talking about withdrawing funds to use as downpayment (and not taking a loan), than yes, that is stupid. Paying for mortgage insurance is a much better option.

[Anonymous]

Anonymous wrote:If you take a loan from your 401(k) there is no tax penalty.

We took a 401(k) loan for a portion of our down payment and paid it back over 5 years at 4% interest. The downsides are (1) the money is not in your pool of retirement money, which maybe is making more than 4%, (2) your paychecks are smaller because your employer deducts the monthly payment, (3) if you change jobs, you have to pay back the loan.

I don't consider the 4% interest a downside since the interest is being earned by your retirement account. It's like taking money from one pocket and putting it into the other.

We decided to do it, but kept the total loan on the smaller side.

THIS. We took out 15k, and will repay at 4% interest in 5 years. We think it works well for us because it allowed to buy a house in a great neighborhood with excellent schools that we would not otherwise be able to afford without the 401k loan. However, we fully intend to pay ourselves back in 5 years.

[Anonymous]

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

[Anonymous]

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.

[Anonymous]

You can take a loan, which you have to repay if you leave your employer and if you can't, there are huge tax penalties. You can also take a hardship withdrawal, which does not require repayment, but you have to suspend your contributions for 6 months so you lose the compound interest on the withdrawal and you lose out on contributing as well.

[Anonymous]

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.

[Anonymous]

What if you started a new job and your current 401K doesn't have a high enough balance vs your old 401K account? We were told we wouldn't be able to borrow from prior employer's 401K account. Could we transfer the old account to an IRA and withdraw money that way for financing down payment?

[Anonymous]

Anonymous wrote:What if you started a new job and your current 401K doesn't have a high enough balance vs your old 401K account? We were told we wouldn't be able to borrow from prior employer's 401K account. Could we transfer the old account to an IRA and withdraw money that way for financing down payment?

roll the old one into the new one and then you can take the loan.

[Anonymous]

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

[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

+1

I took out $10k to buy my house in 2003, without penalty (first time home buyer withdrawal) though I did have to pay the tax owed. My house is now worth 5 times what I paid for it and I would not have been able to buy it without. That return far exceeds what I'd have got if I'd left it where it was. for me it was absolutely the right decision.