Dennis asked in Business & FinanceInvesting · 1 decade ago

Should I cash out my 401K to buy my first home?

Houses in my area are very cheap now I just looked at a really nice foreclosure for $40,000! My job is very secure.

People keep saying now is also the time to buy stocks but I just don't have any confidence in the financial sector anymore. I keep thinking it took 25 years for most people that lost their investments in the 1929 stock market crash to get their money back. Also my mortgage will be less then my rent. I think with all the thievery that's going on real estate may be the safest investment because your house just can't disappear.

The stimulus also includes a $7500 tax credit for all first time home buyers.

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  • 1 decade ago
    Best Answer

    Actually, conceptually, I am more on your side of thinking that the other posts on this one with some clarity.

    First your thinking of buying if you don't own may be a good idea.

    Factors:

    1. Location. Location. Location.

    2. Mortgage terms (fixed only rates for the entire term,. no short term rates).

    3. The length of time you plan to live there.

    4. buying a distressed property would prob be preferred over someone just selling.

    The 401(k) question:

    1. Cashing out is not how I would handle this. What you would want to to is to take a qualified withdraw for being a "first time home buyer." This eliminates the 10% under 59 1/2 penalty. To be safe under this exemption, the money should not be sent to you, it should be sent to the escrow company.

    2. I don't know what your 401(k) balance is so, if you have a lot of funds there, I might just consider taking out the exempt amount for there house.

    3. Just liquidating a 401(k) would subject one to 100% of those funds as taxable income and be subject to a 10% IRS penalty if under 59 1/2. The result of this typically wipes out 40-50% of your assets due to taxes and penalties in my experience.

    Source(s): Might want to read more here: http://www.hud.gov/buying/ http://homebuying.about.com/od/buyingahome/bb/shop... http://www.fool.com/school/taxes/1999/taxes990521.... --- 401(k) & Retirement Planning Specialist (see disclaimers on bottom of 360 profile)
  • Anonymous
    1 decade ago

    Before you make any rash decisions, get the facts.

    In the 30's the market recovered fully in under 10 years. The people who took 25 years to recover their losses were the people who panicked and pulled their money out while the market was low. People who left their money in through the whole thing recovered in less than 10 years. In the history of the US stock market, there has never ever ever been a 10 year period of time in which the market lost value.

    In addition to the fact that now is a really really bad time to sell your stock based investments, you will pay taxes and penalties on the money you withdraw from your 401k. The amount you'll get after taxes and penalties is about half of what you withdraw.

    So when you combine the fact that the market is about 50% low right now, with the fact that you pay penalties for early withdraw, you are only going to get about 25 cents for every dollar of value that you remove from your 401k. That's simply not good returns.

    I suggest you live on a beans and rice budget and work a 2nd job for a few months and see where that gets you in terms of buying a house. You may find that 4-6 months of sacrifice pays off big in the future, without having to clean out your 401k.

    Plus, before you jump head over heals for the $7500 tax credit for 2008, make sure you understand that it is acutally an interest free loan that you pay back $500 per year on your taxes. The new credit for 2009 is $8,000 that you don't have to pay back. Just make sure you have all the facts before you act.

    Edit: Net Advisor is wrong. You can take money out of an IRA for a first time home purchase, but not from a 401k.

  • Judi
    Lv 4
    4 years ago

    However you decide to finance the transaction, do not take a withdrawal, take a 401(k) loan. You repay yourself and do so with no tax penalties. A withdrawal from the 401(k) is also possible, but the value is never restored, the money withdrawn is subject to a penalty and gets taxed as income for the year it is taken out of the account. P.S.- In the new stimulus package, first-time buyers can claim a credit worth $8,000 - or 10% of the home’s value, whichever is LESS - on their 2008 or 2009 taxes. A big plus is that the credit is refundable, meaning tax filers see a refund of the full $8,000 even if their total tax bill is less than that amount. To qualify, the purchase must be made between Jan. 1, 2009 and Nov. 30, 2009. Buyers may not have owned a home for the past three years to qualify as “first time” buyer. They must also live in the house for at least three years, or they will be obligated to pay back the credit. Additionally, there are income restrictions: To qualify, buyers must make less than $75,000 for singles or $150,000 for couples. (Higher-income buyers may receive a partial credit.)

  • 1 decade ago

    The guy who claims to be a 401k and retirement expert should educate himself before answering other people's questions - penalty free withdrawals for first time homebuyers are allowed from IRA accounts, but not from 401ks.

    I don't think your decision is as clear-cut as some of the knee-jerk answers you are getting would suggest. It is especially tempting to buy this year. You are right that the stimulus bill contains a tax credit for first time home buyers, although the amount is actually 10% of the purchase price up to a maximum of $8,000. You have to buy before December 1 to qualify. So, if you withdraw just enough for a 10% downpayment on a $40,000 house, the tax credit should be worth more than the taxes and penalties on your 401k withdrawal.

    Still, premature withdrawals from 401ks are among the absolutely most expensive sources of money. Are you absolutely certain that there is no cheaper source of money for you? In particular, I wouldn't be surprised if some banks in your area are looking at the tax credit as a source of downpayment money and might be willing to loan you the 10% downpayment if you agree to repay it with the money from your tax refund. Please look into your options before withdrawing from your 401k.

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  • what?
    Lv 6
    1 decade ago

    that would be incredibly dumb.

    why do you want to sign up for a 10% penalty on early withdrawals? and then there's the up to 35% of regular income tax that you'd owe on it, too.

    why would you want to throw away up to 45% of your 401k to come up with a down payment?

    plus, you might have to give back some or all of the matching contributions if you want to get your money out, depending on how your plan is set up.

    is it really worth it to you to throw away potentially more than half of the value of your retirement account just for a down payment? i would think not.

  • 1 decade ago

    Not the wisest thing to do, but you can take out a loan from your 401K, up to 50% or $50,000 whichever is lower. You do have to pay back interest and principal back to yourself. check it out.

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