Using 401K/IRA for help towards down payment?

Just wondering if you had any basic info on doing this.

I have a Roth IRA and my wife has a 401K Simple IRA. We are not first time home buyers. Most google searches talk about first time home buyers however I've yet to see anything for people who are not first time home buyers. Can you give me any info on what we can and can't do? How much can be used, if any.

The home would be located in VA.

Thanks.

With a Roth you can withdraw contributions without penalty. With a 401K I believe you can only borrow from yourself and those rules are defined by the 401K plan. If you have changed jobs and moved that 401K money to a self directed IRA I don't believe you have that option.

You are better off borrowing and keeping your 401K in place. You will incur significant tax penalties by early withdrawing. The Roth can be tax free, but I think at age 55.

Depending on how it's down you can pay yourself back plus interest and not have any fees however it's limited in the amount and mostly tied to first time buyer articals.

Trying to figure out the details to see if it's even an option for us.

I've used my 401K for a loan before. The payback was automatically deducted from my paycheck. If I left the company before I paid it back, I had to repay all of it within a few months or get hit with the penalties. Not a bad deal. There was a few points of interest. It all went back into my account.

jeffie7 said:

Depending on how it's down you can pay yourself back plus interest and not have any fees however it's limited in the amount and mostly tied to first time buyer articals.

Trying to figure out the details to see if it's even an option for us.

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Don't do it.

jeffie7 said:

Depending on how it's down you can pay yourself back plus interest and not have any fees however it's limited in the amount and mostly tied to first time buyer articals.

Trying to figure out the details to see if it's even an option for us.

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Yes, often 401K loans to yourself have very small fees. For example, from my plan the fee is $50 and the interest rate you pay to yourself is 5%. So, yes you are not making money on the principle you removed, but in order for you to be better off you would have to be sure your investments are making more than the difference between what you would be paying to someone else in interest for that same amount of $.
It can be pretty complicated, but this is what I would recommend. If you have $ in a 401K, leave it there because if you decide to leave your job and can't stay in that plan, you have to pay it back. With the Roth, whatever money you put in it you can take out without penalty because you already paid taxes on it. If this is a significant amount, it beats paying a bank interest for 30 years unless, again, you are sure your investments will make more than the difference and what you can write off your taxes.

Some background, I wouldn't be thinking about using IRA money if it wasn't a good option depending on what can and cannot be done...

We have always kept things where 1 income is enough to make ends meet. Because of that, when our son was born almost 4 years ago, I was able to cut back on work. Currently we are living off of 1 income and my part time income pretty much goes into savings. If things work out, with this year, I will be back on a full income, this means excluding extra cost for another kid being in daycare, almost a whole income will get straight into savings.

Our next home will be another townhome with the goal of turning it into a rental, the plan is to buy another townhome, live in it as we save up for another down payment to finally buy a nice single family home. In order for this to make sense, we need 20%+ down in order to both avoid FHA, and make it so we can roll it into a rental that makes sense money wise. (so we make a few bucks)

Our current lease for the home we are currently renting is up in April 2018 which gives us some time.

We can...

Sign another lease at our current rental which is $2200.00/mo (might go up) and keep saving, by April 2019 we would most likely have well over 20% down.

Or

Take out some money from our retirement to use for a down payment. Every month dump what would have been our savings back into the IRA, if I have a full income, we'd easily repay it within a year.

If we keep renting, we can easily save, but we are paying someone else's house loan down... 1 year lease = $26,400.00, of which ZERO of it can be written off.

Congratulations, you're going to have more children! Just a guess. (someone is nesting)

jeffie7 said:

If we keep renting, we can easily save, but we are paying someone else's house loan down... 1 year lease = $26,400.00, of which ZERO of it can be written off.

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This is a key point which clearly you already recognize. The wild card here is, what is going to happen with interest rates between now and year from now when you start looking to buy. It doesn't take many bumps by the Fed to significantly impact your monthly payment. I would keep thinking on it. I think under today's scenario, if you can replace your self borrowed money that quickly, why would you not?

Silverlode said:

This is a key point which clearly you already recognize. The wild card here is, what is going to happen with interest rates between now and year from now when you start looking to buy. It doesn't take many bumps by the Fed to significantly impact your monthly payment. I would keep thinking on it. I think under today's scenario, if you can replace your self borrowed money that quickly, why would you not?

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That's why I started the thread. I'm not sure the rules. I know with a 401k it sounds like we can borrow only up to $10k
With a Roth it sounds like anything is fair game. However I'm not sure if that's true or if there's a catch... Hoping a mortgage guy can confirm what can and can't be done.

3 and 1 year old. Once I'm full time again and we get into another home... no plan for another kid but hey it could happen. I wouldn't be caught off guard if it did. We are both pretty sure we are happy with a 2 pack. But who knows what life brings.

jeffie7 said:

That's why I started the thread. I'm not sure the rules. I know with a 401k it sounds like we can borrow only up to $10k
With a Roth it sounds like anything is fair game.

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Roth - Fed law is you can always take out whatever money you put in and already paid taxes on.

The 401K question is only going to be answerable by whoever administers your plan. For example, the plan I am in, I can take up to 50% of my vested balance for any reason I want. The only difference is, if it is for a primary residence, I can take a longer term to pay it back. Get the plan rules from the employer.
Two points: We are talking only about a loan in the instance of the 401K. If you take a draw, you will be penalized. Also, if you have rolled a 401K over into a self directed IRA (likely if you changed jobs), I don't think you will have an option to take out a loan on that.

I listen for what I'm not hearing, which is: 'this property is selling for below 80% of its market value in a neighborhood that is appreciating at over 6% a year'. Future value, Future value, Future value (kind of like: location, location, location, but with more meaning). You can borrow for the house, but the bank doesn't care if home prices go down, you still have to pay off the loan.

Silverlode said:

Roth - Fed law is you can always take out whatever money you put in and already paid taxes on.

The 401K question is only going to be answerable by whoever administers your plan. For example, the plan I am in, I can take up to 50% of my vested balance for any reason I want. The only difference is, if it is for a primary residence, I can take a longer term to pay it back. Get the plan rules from the employer.
Two points: We are talking only about a loan in the instance of the 401K. If you take a draw, you will be penalized. Also, if you have rolled a 401K over into a self directed IRA (likely if you changed jobs), I don't think you will have an option to take out a loan on that.

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I've been at the same place forever, however, I have the Roth account.
My wife has moved up every 2 years or so. So her 401K is spread out all over and most likely isn't worth touching due to her time on the current job.

However if my Roth IRA is only limited by the amount in there, then it makes it a good option to tap into.

What it comes down to is when the time comes, how much money would I need to draw... depending on how fast things move along this year, it might not be much... On the flip side, if this year doesn't pan out, then renting another year is a given.

To: jeffie7:
Some of your info comes out in pieces over several posts, like you’re giving a deposition .

You say your wife has a 401k Simple IRA. I hope you mean both a 401k and a Simple IRA. I know of no such animal as a 401k Simple IRA. There is 401k, Simple 401K, Simple IRA and IRA. A 401k is a qualified retirement plan; and IRA isn’t.

You state that your wife moves every couple years, with the implication that these moves involve changes of employers. If that’s the case, and she has a string of 401k accounts with prior employers—unless her current employer’s plan is a stinkeroo—she might consider rolling those legacy accounts in to her current 401k account, assuming her current plan permits this. ERISA regs do. A major reason to do this is higher potential loan limits. A 401k loan is limited to the lesser of 50% of the vested balance, or $50,000. If you’re going to consider this funding source, make it as big as possible. Plus, it simplifies your paperwork.

“The main thing is to keep the main thing the main thing.” It would appear that your big picture main thing is to end up in a nice single family home as your “domestic base of operations.” That would appear to be your main driver—your big picture focus. If so, other decisions would ideally be made with an eye toward their impact on the accomplishment of that goal.

Questions:
1. How much cash do you currently have? (Don’t answer online.)

2. What is your cash required to purchase the townhouse that will become your rental property?

3. Given that when you buy real estate what you are actually buying is the right to the future value, and given that success is investment real estate is driven by leverage, what is the least amount you would have to use to tie up the real estate? It’s not about top line cash flow. It’s about bottom line cash flow after application of deductions, including taxes, insurance, maintenance and depreciation. You may well be wise to explore an FHA loan, FHA insurance and all, to minimize the cash you have to tie up the real estate, and the right to its future value. This strategy could put you in a negative cash flow situation for several years, but enable you to accumulate the cash needed to buy your target home a couple years earlier than otherwise would be possible. It would also eliminate the need to access a 401k loan.

4. Assuming you use a 401k loan for your final home, that money could enable you to get a non-PMI loan (80% LTV) without having 20% in cash in the bank. The question is this: how much money does your wife have in that Simple IRA account? In the event she changes jobs with the 401k loan outstanding, you could do a 60-day tax-free withdrawal from the IRA, combine that with cash reserves, pay off the loan, roll the account to the new employer 401k, then take out a new loan to reforest your bank account and replace the IRA withdrawal. Deadlines are critical in this scenario to avoid taxes and penalties, and the new loan would not enjoy the stretch repayment period, but would revert to the 5-year limit, but you would be getting maximum use from your money, accelerating your move to your new home, and retaining the tactical prerogatives in your decisions.

By all means, avoid eroding the Roth funds except as a last resort. The future value of this entirely tax free money, post age 59.5 is astounding. This is the holy grail.

You’ve got a lot of positive variables out of which you can craft an excellent financial game plan. I commend you on your desire to take your time and think your way through your decisions.

Disclaimer: For your information, as a practicing CFP, and as a retired mortgage banker, this ain’t the first time I’ve been to the rodeo. Also, please note that this communication does not constitute or imply the establishment of professional engagement; these are general observations based on a limited and incomplete fact pattern, and do not constitute financial advice as defined by the CFP Board of Standards.

TheBert said:

Don't do it.

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Unfortunately, that is not folly advice.

While you can borrow and pay back, IRS always has a way to F you. Even if they clear you after three years of investigation, was the loan worth it?

If it is your only option then sure. Just keep meticulous records. IRS is famous for not accepting rational evidence. It is always "form xxx was not received from the administrator". Then you jump through hoops getting the administrator to get their act together.. ugh..

If you are thinking of borrowing on your 401K for a house or anything else then you can't afford it.

cowboy321 said:

You are better off borrowing and keeping your 401K in place. You will incur significant tax penalties by early withdrawing. The Roth can be tax free, but I think at age 55.

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Silverlode said:

Roth - Fed law is you can always take out whatever money you put in and already paid taxes on.

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^Principal in a Roth IRA is a tax-free withdrawal; you paid tax on that money before you put in.

BigSteve57 said:

If you are thinking of borrowing on your 401K for a house or anything else then you can't afford it.

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Not necessarily. I'd do it for temporary liquidity in a buy/sell situation where you closed on a buy before settling your sell.

BigSteve57 said:

If you are thinking of borrowing on your 401K for a house or anything else then you can't afford it.

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There are numerous scenarios where this isn't even remotely accurate.