401k's to finance down payment

**nickyny87** · 12-04-2010, 04:16 PM

Hello everyone. My name is Nick and I live in Brooklyn, NY. I'm new to this forum and just as new to buying a home. I'm actually 23 years old and my father (who came from a different country) is not at all fluent in real estate, especially here in the United States. So as excited as I am to get an opportunity to look for something to call my own, I realize that our inexperience leaves us with a lot of learning to do before we can make any move.

So enough of the introduction, let's cut to my question, with just a little background for it.
We're not at all wealthy but my father has immaculate credit with at least a 15 year history. We don't have much for a down payment (maybe 5-10k in cash), but he said he is willing to liquidate his 401k. I've read a lot of people advising against this for the obvious reason that it's not good to play with your retirement money, but setting that aside (he knows his retirement future better than anyone), how does financing a down payment with your 401k work? Do you just take out the money with all applicable taxes/fees out or does the bank arrange it for you?

Guidance would be appreciated.

**mpotoczak** · 12-04-2010, 06:20 PM

being a CPA, i could provide you with some tips. in your case, i will assume your dad is still fully employed and not of retirement age. if not the case, everything below is useless...

first, i would recommend seeing if your dad's 401k allows for borrowing from the vested balance. most likely, the borrowing terms are pretty good (my company's are 1% + Prime & $100 closing fee). when your dad reaches retirement age, he can use his 401k funds to pay off the loan.

if there is no borrowing feature in the 401k plan and you have no other source of funds, then you might have to tap into the 401k. the early distribution might cost him at his highest tax rate & 10% penalty, whereas a later distribution would probably occur when he's in a lower tax bracket. 401k's do provide a waiver of the penalty for financial hardship when it comes to primary home purchases. however, you can expect the IRS to be on you if you don't pick up the penalty. if you do go this route, he will have to talk to his 401k administrator on the procedure for withdrawing the funds. the bank really shouldn't get involved.

example: distribution of $50,000 now could cost $17,500 (25% rate + 10% penalty). in 5 years, it could cost just $7,500 (lower 15% rate). that's a $10,000 difference!

bottom line: tapping into a 401k/IRA early can be very costly! see if 401k borrowing is allowed. if you need the actual funds, review your finances with a financial or tax planner to avoid trouble with the IRS (better to pay the planner than the IRS). after you determine the appropriate amount you should withdraw without incurring penalty, contact your dad's 401k administrator to determine the proper procedure for withdrawal.

finally, chicago > new york. yup...

**nickyny87** · 12-04-2010, 06:46 PM

Wow awesome information, thanks a million for your detailed reply.
Yeah I feared that taxes/fees would add up, but 35% (in your example) is certainly a whopper. Especially if it can be reduced by being more creative. So what I got from your reply is: check the terms of the 401k, try to borrow against the 401k and repay it when the fees are cheaper (like at retirement), and speak to a planner before doing anything with the 401k.
Thanks again!
If anyone has any more insight, or tips, it would very much welcome. Specifically about 401k borrowing, and
?how easy is it in this market to get away with a low down payment when you have super good credit.?