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Old 02-06-2015, 11:13 AM
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First Time Home Buyer/ 401k/ IRA

I currently left a company in which I have 20k in a fully vested 401k. I also have 6k in a Roth IRA and 8k in a joint checking account. My wife and I are currently looking to purchase our first house within the next few months. We will need roughly 23K for a down payment/closing costs. What would be the best strategy to avoid the withdrawal penalties of the retirement account. I've heard first time home buyers can avoid withdrawal penalties, but have been reading conflicting articles. According to Merrill I would get hit with a initial 10% tax penalty when withdrawing the 401k as well as a 20% penalty when I file taxes next year.

Would it be smart to withdrawal the whole 20k in the 401k to use towards the home purchase? Any help on this would be greatly appreciated.



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Old 02-06-2015, 08:12 PM
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Originally Posted by jschn549 View Post



#1;I currently left a company in which I have 20k in a fully vested 401k. I also have 6k in a Roth IRA and 8k in a joint checking account. My wife and I are currently looking to purchase our first house within the next few months. We will need roughly 23K for a down payment/closing costs. What would be the best strategy to avoid the withdrawal penalties of the retirement account. I've heard first time home buyers can avoid withdrawal penalties, but have been reading conflicting articles. According to Merrill I would get hit with a initial 10% tax penalty when withdrawing the 401k as well as a 20% penalty when I file taxes next year.

#2;Would it be smart to withdrawal the whole 20k in the 401k to use towards the home purchase? Any help on this would be greatly appreciated.
#1;AS you are buying a home, you may be allowed to withdraw money for that sole purpose without the associated penalty; You may withdraw up to $10K from your traditional IRA and R-IRA for the first-time purchase of a home.in general, You are allowed to borrow half your vested balance or $50k, whichever is less, without incurring a penalty or taxes from 401k. Your employer will provide the paperwork for your loan. Taking a loan from your 401(k) instead of a straight withdrawal will protect you from paying taxes and penalties. There are some exceptions to the 10% additional early withdrawal tax penalty. If you qualify for one of the exceptions, you still have to report your withdrawal as income, but you don't have to pay the 10% additional early withdrawal tax penalty.for example,
the following two exceptions apply only to retirement plans that are Traditional or Roth IRAs:aslongas the distribution ,up to $10k per spouse, was made to purchase a home for yourself, your spouse, or one of either of your parents, grandparents, children, or grandchildren--if you are a qualifying first-time homebuyer (roughly, you who did not own a home for the last 2 years). with your Roth IRA, you can withdraw your principal contributions at any time without a tax penalty. This is not the case with a traditional IRA;
withdrawing their principal from a traditional IRA would be subject to federal, state and local taxes . So your $6k principal has already been taxed before going into the R-IRA. Therefore, it can be withdrawn at any time without paying any additional tax or10% early w/d penalty.







#2;I guess you may withdraw from your bank acct. and r-ira first then, you may withdraw
From 401k for the remaining balance for the downpayment. However, the costs may not be worth it. if you are younger than 59 ½, any money that you withdraw from your 401k to buy a house is subject to the appropriate income taxes. You will also pay a 10 per cent ‘early withdrawal penalty’.Keep in mind also that your employer does not have to offer the ability to make a hardship withdrawal. You should therefore check that such a withdrawal is available to you.so I guess You may be better considering other options such as borrowing money from friends of family or delaying your house purchase until you can save up more of a downpayment.



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Old 02-07-2015, 01:39 PM
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Originally Posted by Wnhough View Post
#1;AS you are buying a home, you may be allowed to withdraw money for that sole purpose without the associated penalty; You may withdraw up to $10K from your traditional IRA and R-IRA for the first-time purchase of a home.in general, You are allowed to borrow half your vested balance or $50k, whichever is less, without incurring a penalty or taxes from 401k. Your employer will provide the paperwork for your loan. Taking a loan from your 401(k) instead of a straight withdrawal will protect you from paying taxes and penalties. There are some exceptions to the 10% additional early withdrawal tax penalty. If you qualify for one of the exceptions, you still have to report your withdrawal as income, but you don't have to pay the 10% additional early withdrawal tax penalty.for example,
the following two exceptions apply only to retirement plans that are Traditional or Roth IRAs:aslongas the distribution ,up to $10k per spouse, was made to purchase a home for yourself, your spouse, or one of either of your parents, grandparents, children, or grandchildren--if you are a qualifying first-time homebuyer (roughly, you who did not own a home for the last 2 years). with your Roth IRA, you can withdraw your principal contributions at any time without a tax penalty. This is not the case with a traditional IRA;
withdrawing their principal from a traditional IRA would be subject to federal, state and local taxes . So your $6k principal has already been taxed before going into the R-IRA. Therefore, it can be withdrawn at any time without paying any additional tax or10% early w/d penalty.







#2;I guess you may withdraw from your bank acct. and r-ira first then, you may withdraw
From 401k for the remaining balance for the downpayment. However, the costs may not be worth it. if you are younger than 59 ½, any money that you withdraw from your 401k to buy a house is subject to the appropriate income taxes. You will also pay a 10 per cent ‘early withdrawal penalty’.Keep in mind also that your employer does not have to offer the ability to make a hardship withdrawal. You should therefore check that such a withdrawal is available to you.so I guess You may be better considering other options such as borrowing money from friends of family or delaying your house purchase until you can save up more of a downpayment.
Wnhough thank you for the response. I just left the company I have the 401k with and am starting a new position within a week. For this reason I don't believe I would be able to take out a loan. Is that correct?

With the money in checking account and r-ira I would only need to withdrawal less than half the $ in my 401k.
I am able to do a hardship. So the 401k would only be taxed 25% (tax bracket) and not the 10% because it is being used towards first home ?

The remainder of the 10k in the 401k, would it be better to roll that into the r-ira or new company 401k ?



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Old 02-07-2015, 02:34 PM
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Wnhough thank you for the response. I just left the company I have the 401k with and am starting a new position within a week. For this reason I don't believe I would be able to take out a loan. Is that correct?=========>>>>>>>I guess it depends; you must check with your 401k plan administrator or investment company . Some 401k pans have a rule that you can’t contribute to your 401k until you’ve completely repaid the
401k loan.I guessyou can find their contact information on your statement to find out if your plan allows you to borrow against your account balance. but it's important to understand that 401k borrowing has some drawbacks.UNLESS you work for the company where your 401k plan is at, you may not take a 401k loan; at the time you take a 401k loan you pay no taxes on the amount received. If the loan is not repaid according to the specific repayment terms then any remaining outstanding loan balance can be considered a distribution. In that case it becomes taxable income to you, and if you are not yet 59 ½, a 10% early withdrawal penalty tax will also apply.
Note; another strategy is; as said, the first-time home buyer exception does not apply to distributions from your 401(k). The exception only applies to distributions from IRAs. Plus, the exception, among other requirements, is capped at $10K for the life of an IRA owner,so there are a few potential strategies here. "First, if you are eligible to take a distribution from your 401(k) plan, youcould roll money over to an IRA, and then take a distribution from the IRA of up to $10K and claim the exception to the 10 percent earl W/D penalty, assuming you meet all the other requirements.

With the money in checking account and r-ira I would only need to withdrawal less than half the $ in my 401k. =======>>>>I know that; please read above.
I am able to do a hardship. So the 401k would only be taxed 25% (tax bracket) and not the 10% because it is being used towards first home ? ====>>>>>>>>>as mentioned above, no; the first-time home buyer exception does not apply to distributions from your 401(k). So, unless you are under the age of 59 1/2, you cannot withdraw funds from your 401K plan to purchase your first home without being subject to a 10 percent additional tax on early W/D distributions from 401K.

The remainder of the 10k in the 401k, would it be better to roll that into the r-ira or new company 401k ?=========>I thnk so instead of taking out a 401K loan; If you’re borrowing to buy a home, you’ll have more time perhaps up to 15 years. The exact term depends on the employer. If you don't pay it off in the prescribed time, the IRS will consider this an early withdrawal and you'll owe taxes plus a penalty if you're younger than 59 ½.



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