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How I can get money from my 401 k to buy a house?

I need some money for closing a houses I want to get it from my 401k

Apr 02, 2012 by Maxvin from Houston, TX in  |  Flag
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2 votes

Hi Maxvin,

There may be several ways to do this depending upon your situation.

First, as Evan indicates, your plan may allow you to take a loan from your 401(k). Generally, this is limited to a maximum of the lesser of 50% of your vested amount, or $50,000. You must pay your loan back on a regular schedule, and you must pay yourself a reasonable amount of interest. Usually, your plan's Summary Description (SPD) will tell you all about it. In the event that you default on this loan, the entire amount becomes a taxable distribution - along with any early withdrawal penalties.

Depending upon your situation, there may be two other alternatives that I can think of. Assuming you are still employed at your employer, you may be old enough for what is called an "in-service withdrawal." If you are age 59 and 1/2, and still working at that employer, you may be allowed to do an in-service withdrawal. This may be helpful because in the event that you have any "after-tax dollars" accumulated in your 401(k), you can distribute these separately. That may help a bit on the tax bite, as it would be penalty and tax-free.

The third situation I can think of is if you are no longer employed by that employer - AND have reached the age of 55. Unlike IRA's, 401(k) plans allow penalty-free withdrawals from a 401(k) upon reaching age 55 - IF you are no longer employed by that employer. This is a reason some people will keep their 401(k) accounts with their old employer even if they leave that employer's service, instead of rolling it to an IRA as is the typical financial services industry mantra.

Do you have any IRA assets to tap first? IRA's allow penalty-free (but still taxable) withdrawals up to $10K for a first-time home purchase. Strangely enough, the "first time" resets every 2 years... so even if it is not your first home purchase, this might be a better way to go, depending upon your situation. That withdrawal, of course, would be taxable. Even if there are previously taxed dollars (dollars you contributed but did not deduct) in the IRA, all distributions are taxed on a "pro-rata" basis - meaning that each withdrawal is considered taxable and tax-free, depending upon the percentage of the taxed and untaxed dollars within the IRA. But at least you wouldn't have a loan you would have to pay back to avoid getting seriously penalized in the event you were laid off or some other unforseen circumstance.

Jon Castle http://www.WealthGuards.com

Comment   |  Flag   |  Apr 02, 2012 from Jacksonville, FL

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A loan from the plan would be the way to go, assuming the plan document allows for it. The interest you pay back is to yourself, however the amount borrowed does not stay invested ( untill the loan is re-paid) Good luck!

Comment   |  Flag   |  Apr 02, 2012 from Port Washington, NY

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Hi Maxvin, Both of the other answers are great but keep in mind once you borrow money from your 401(k) you pay the money back with after tax dollars. Then when you withdraw them for retirement you pay taxes on the money again. I think the IRA or if you can get money anywhere else first before the 401(k) would be better. That being said it is a good time to buy a home if you are going to stay in it for a while and rates are extremely low if you qualify. Good Luck.

Comment   |  Flag   |  Apr 02, 2012 from Loveland, OH

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