IRA or 401k question

[Russ Smith]

I just discovered that the 10,000 borrowing without penalty for first home purchase only applies to IRA's, not 401K's. Has this always been the case and does anybody know why?

I have both an IRA and a 401k but my girlfriend just has a 401k.


If she were to change jobs, I assume she can just roll the 401K money into and IRA and then take the 10K for first time buy provision or is there some minimum time it has to be in the IRA before you can do that?

 

[Linderbee]

when I last had a 401k, it was in all my paperwork that I could borrow from it for a home purchase. That was about 2 years ago. Not sure when that changed, sorry.

 

[NMCard]

My 401k allows you to borrow up to 50k for home loans. You just need to have double the amount you borrow in your 401k to cover the loan in case you lose your job.

You can also borrow for medical hardship and to further your education.


I borrowed 10k from my 401k a few years back to help with a down payment on a home. It cost me 50 bucks and I pay myself back 5% interest.

 

[Russ Smith]

when I last had a 401k, it was in all my paperwork that I could borrow from it for a home purchase. That was about 2 years ago. Not sure when that changed, sorry.

Sorry yes you can do that but with the IRA you can take it out penalty free you just pay normal tax on it. With a 401K you can borrow against it but you pay it back and if you say change jobs or lose your job, you have to repay the loan in like 60 days or the whole thing is considered an early withdrawal and you get penalized.

 

[Jersey Girl]

Sorry yes you can do that but with the IRA you can take it out penalty free you just pay normal tax on it. With a 401K you can borrow against it but you pay it back and if you say change jobs or lose your job, you have to repay the loan in like 60 days or the whole thing is considered an early withdrawal and you get penalized.

Wow. I did not know all of this.

So, if I go to buy a house in a year or two, I can borrow up to $10K of my IRA money penalty-free? So, how does that work? I just pay tax on it and then pay it back to myself?

 

[Russ Smith]

Wow. I did not know all of this.

So, if I go to buy a house in a year or two, I can borrow up to $10K of my IRA money penalty-free? So, how does that work? I just pay tax on it and then pay it back to myself?

I'm still getting my head around the whole thing but as I understand it from an IRA only(regular or ROTH) you can withdraw 10K for a first time home purchase. First time home is a misnomer though it means you can't have owned a home in the last 2 years so in your case even though you previously owned one, when you hit the 2 year figure you are now eligible for this. With a standard IRA 10K is the total EVER you can withdraw, so you can't do 10K every 2 years.

My understanding is this is not "Borrowing" you are withdrawing without the penalty for early withdrawal, but you are taxed on it as ordinary income. That I assume means end of year you have a 10K income on your taxes, but if you bought a house you're going to have some tax breaks from that which should offset the extra 10K income.

With a 401K you can borrow whatever amount your plan allows, but you ARE borrowing it, you have to repay it, usually by a set period, and if you change jobs the loan now comes due within I think 60 days. So if you borrow 10K and then change jobs and can't repay it, it's now considered an early withdrawal and you get penalized on it and of course taxed at the end of the year.

So if I get this correctly the IRA way is much safer.

 

[Jersey Girl]

Cool.

Can you borrow from a 401k with a previous employer? I am guessing no, which would suck in my case. But, the IRA thing is pretty super cool. I have a ROTH from an old job that is just sitting there not doing much of anything. It's nice to know I can cash it out penalty free to help me purchase something in the future.

 

[AZCB34]

My understanding is this is not "Borrowing" you are withdrawing without the penalty for early withdrawal, but you are taxed on it as ordinary income. That I assume means end of year you have a 10K income on your taxes, but if you bought a house you're going to have some tax breaks from that which should offset the extra 10K income.

Are you withdrawing from a Traditional IRA or Roth IRA? That can have an effect on the end of year tax issues.

 

[Russ Smith]

Cool.

Can you borrow from a 401k with a previous employer? I am guessing no, which would suck in my case. But, the IRA thing is pretty super cool. I have a ROTH from an old job that is just sitting there not doing much of anything. It's nice to know I can cash it out penalty free to help me purchase something in the future.

Has to be a house though, has to go directly towards the purchase of the house you can't use the 10K to buy new furniture for the house or something like that. I was reading about it peopel that find out too late about this rule, already have the house and now want to use the 10K to do something else in the house and they can't.

note, you can withdraw from an IRA at any time, but with huge penalties so it makes no sense to do that. The house rule is the only time I'd ever consider doing it.

 

[Russ Smith]

Are you withdrawing from a Traditional IRA or Roth IRA? That can have an effect on the end of year tax issues.

traditional. Wouldn't be this year it'd be next year probably.

My understanding is the withrdawal is taxed as ordinary income so in theory if you do it the same year you buy the house, the writeoffs from buying the house offset the taxes on the withdrawn money.

Of course if you have 100K in your ira and take out 10K, you now have 90K in your IRA so it grows slower.

The problem with borrowing from a 401k is you can never actually repay it. If you have 100K and borrow 10, you have to repay it with interest but that interest is virtually never going to equal the interest you WOULD have made had you left that money in there. So you can never regain that money. If you pay it back to where you have 100K again, you're still going to be several thousand behind where you would have been without borrowing. Should only be done in complete emergency to avoid losing a house or medical emergency type situations.

The key to the IRA thing is there is no penalty and you don't have to repay it, you just shrink your IRA.

 

[abomb]

Sort of related.

http://money.cnn.com/2007/10/30/pf/401k_withdrawal_loan/index.htm?postversion=2007103112

 

[Russ Smith]

Sort of related.

http://money.cnn.com/2007/10/30/pf/401k_withdrawal_loan/index.htm?postversion=2007103112

That's a great article I just sent it to my friend who is still considering using her 401K to pay down credit card debt. I convinced her to talk to a financial expert first

 

[Lefty]

I am a little confused. I thought if a first-time homebuyer withdraws say $5000.00 from their Roth or traditional IRA, there is no early penalty and they don't have to report it as income. Is this true or false? Thanks.

 

[Linderbee]

I thought this was true as well...or it may be a "standard" that has to be in the verbiage of the 401k, and doesn't necessarily "have" to be. Not sure.

 

[Bada0Bing]

I am a little confused. I thought if a first-time homebuyer withdraws say $5000.00 from their Roth or traditional IRA, there is no early penalty and they don't have to report it as income. Is this true or false? Thanks.

I'm no tax expert, but I suspect the government is not going to let you tap a traditional IRA or 401K and not pay ordinary income taxes on it. That would be too sweet of a deal since it went in pretax. I'd suspect they'd let you dig into a Roth though. You've already paid tax on that.

 

[kps0001]

I think it may depend on your employers plan. I am currently withdrawing early, not borrowing, my 401k to purchase my first home. the way I had to do it is take out the max loan I could but then at the same time apply for economic hardship early withdrawal for the purchase of a home. I am now able to take the amount I needed, penalty free, and I don't have to pay it back.

 

[Bada0Bing]

I think it may depend on your employers plan. I am currently withdrawing early, not borrowing, my 401k to purchase my first home. the way I had to do it is take out the max loan I could but then at the same time apply for economic hardship early withdrawal for the purchase of a home. I am now able to take the amount I needed, penalty free, and I don't have to pay it back.

Will you have to pay taxes at your ordinary income tax rate in 2009?