Down payment with 401k?
I'm in my late twenties...interest rates are low...housing prices are falling....
I didn't plan on buying a home as Southern California is very expensive. But...it's not looking too bad. Lots of short sales and foreclosures...
The only challenge I have is whether to take a hardship "withdrawl" from my 401k to jump in. I know it's usually not a good idea for tax reasons and loss of future compounded interested.
However, assuming the housing market rebounds in the next 10 years, I'll easily make up what I lost in the compounded interest.
For some strange reason, I FEEL inflation will eat away my 401k savings. (Get rid of that cash...)
Buying this early in the year will help add up as much tax savings as possible...
I don't think a 401k loan will work...it will add to my debt ratio.
What are your answers?
The houses are between 300k-400k...
Also...is PMI now tax deductible?
- 1 decade agoFavorite Answer
Inflation eats away at everything...even the price of a home. and prior poster is 100% wrong...you will STILL get hit with 10% penalty. First time home buyers are NOT exempt from the 10% early withdrawal tax from a distribution from a 401k. That exemption only applies to an IRA.
Short Term Consequences are a 10% penalty PLUS the distribution amount is taxable income. You have the ability to name your withholding amount. It is not a mandatory 20% withholding though if you're in the 20% tax bracket it wouldn't be a bad idea to have 30% withheld to account for that tax and the 10% penalty.
That being said, don't do it. You're trading assets that are EARNING money for one that requires you to PAY money (interest on loan). The house is going to appreciate whether you put 10% down or 20% down. In most areas of the country, that appreciation will exceed any down payment. If you can get into the home with zero down then 100% of that appreciation is due to leveraging which is the best way to earn money. Essentially you've earned it using someone elses money...That's no different then the 401k match which everyone seems to understand as a good thing.
And, once you pull the money out of your 401k you really can't put it back in; unless it's a loan which forces you to stay with your employer or it becomes taxable.
Most importantly...in 30 years that house is going to be paid off whether you put 0% down or 10% down. So you're really only talking about the INTEREST difference between putting in that 401k money and not putting it in.
So, let's assume that you take 30k out of your 401k for a house. In 30 years that 401k has lost out on $198,000 of principal and interest (assuming conservative 6.5% return). But, if you look at a 300k home loan versus a 270k home loan (difference is that 30k that you would have put towards the house) the interest differential (amount of interest you pay over the 30k) is only $35,000.
Basically means by paying $30,000 on the front end you've saved yourself $35,000 in interest payments. BUT, you've cost your retirement $198,000. You're $163,000 worse off by doing it.
Better off putting 10% down and paying PMI for a few years. When you turn 67 and retire...you'll thank me. If you don't even have the 10%; then go in with nothing down. If you can't do that it's because your credit rating is not that good. If that's the case then that's what you should be concentrating on in the short term.
- 1 decade ago
yes, PMI is deductible starting this year. If this is your first home, taking money out of your 401K is absolutely the correct thing to do. You are allowed to do that on a first home without incurring any penalties. If this is not your first home you will be penalized (taxed heavily on the money you withdraw) and I would not do it. Interest rates are so low that a larger downpayment probably wouldn't save you much month to month.
You are wise in realizing inflation will eat at your 401K. I hate when people give investment pep talks and tell you how much money you will have made in your retirement fund in 30 years. What they don't tell you is a gallon of milk will be $10!
Oh sorry. I was wrong. I was thinking of an IRA. What the guy said below me!