Using 401K/IRA for help towards down payment?

my personal opinion is that removing money from your Roth IRA is for emergency use only. its there, it is like emergency savings as you can always take out your contributions, but as stated before, having a large chunk of change in a roth IRA is as good as it gets. you can only contribute 5k annually, so you are limited by how much you can put in total, however once you hit 59.5 (and beyond) its all tax free, and the best part is you NEVER have to take any money out, as there are no mandatory withdrawals. you can also pass down your roth IRA as inheritance, with beneficial tax rules.

now if you withdraw your principal from your roth you CANNOT put it back in.

401k loans are an alright option. but most require that you pay the loan back in full before you can make any changes, so that limits you. personally i would sell off other assets before i would tap into retirement savings. also investigate other types of loans you may be eligible for that do not require a 20% downpayment nor PMI, they exist and they are out there. a lot of credit unions offer loans like this (you do pay a higher interest rate usually, usually somewhere in the 1/4 to 3/8 % more range) if you qualify for membership.

as was stated before, if your wife can roll over her IRAs into one, that should definitely be the first thing you worry about, unless her current one is garbage.

side note about turning a home purchase into a future rental. be 100% sure it will be worthwhile. you spend 300k on a house (60k down, 240k mortgage) and your montly payment (depending on taxes) will be in the 1500 a month range. if you can get 2k montly for rent on that house after you move out, i would say that is the bare minimum margin you would want to maintain (things break, you need to deal with a tennant, you may have months where its empty or your tennant squats as you evict). also remember when you sell a home (future profit taking) you will pay income tax on the difference in price between buy and sell, regardless how much you spend fixing, unless you have lived in the house as your primary residence for 2 of the last 5 years. you live in NOVA, and depending on location and house size, my example is quite low.

it is very hard when you buy a house to live in AND be an investment property. a house you live in isn't an investment, it is a cost for you and your family to live. an investment is something that makes you money. while you live in a house it DOES NOT make you money. now if the correct opportunity presents itself, then jump on it. but likely it will be a distressed home that needs remolding that can fufill both roles as primary residence AND future investment. a ready to move in home is almost always at top dollar, and top dollar ain't going to make you money as a rental, especially in NOVA where housing prices are astronomical, and rent is only moderately high for the area, but the cost to buy vs rent isn't great in nova unless you can find a deal.

my advise is don't try to force a place to be an investment and primary residence. you spend a lot of extra money on a house you live in, vs a rental property. you will want nicer finishing than you would put in a rental that will never pay for themselves in an investment property

TheBert said:

Don't do it.

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hillbilly grandpa said:

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

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Sorry, I started this thread with the goal of simple info for being able to use 401K/Roth money for a loan, it turned into a bigger thread than I had expected

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.

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Sorry I've always had a Roth account, I'm not sure what her 401K is but since it was between her and her employer I assumed it was a simple IRA. Regardless, it is a type of 401K, the money going in is pre taxed dollars.

“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.

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At the current rate, if I become a full time employee, we will have no issue coming up with the down payment over the following year. question we need to figure out is, is it worth saving another year, vs dipping into retirement and repaying it back over the follow year if not less time.

I would like to avoid FHA is possible, It's one thing if we can drop PMI once we reach our 80/20 split however, on our current home (that we own but don't live in) we hit the 22/78% mark but could not drop the PMI due to it being a 5 year minimum before falling off. Doing a refi could be an option but going from a FHA to a Conventional loan isn't cheap and would eat up a large chunk of money. If we can avoid FHA I plan to. Plus rates could go up making it a even harder pill to swallow.

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.

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Just trying to figure out how to best use our money.

I just wanted to add a point of clarification should you decided to use the ROTH IRA dollars.

You can withdrawal your contributions (not the earnings) without income taxes or IRS penalty anytime unless, you had converted a Traditional IRA to the ROTH IRA, in which case you have to wait 5 years.

Z_Man said:

my personal opinion is that removing money from your Roth IRA is for emergency use only. its there, it is like emergency savings as you can always take out your contributions, but as stated before, having a large chunk of change in a roth IRA is as good as it gets. you can only contribute 5k annually, so you are limited by how much you can put in total, however once you hit 59.5 (and beyond) its all tax free, and the best part is you NEVER have to take any money out, as there are no mandatory withdrawals. you can also pass down your roth IRA as inheritance, with beneficial tax rules.

now if you withdraw your principal from your roth you CANNOT put it back in.

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That makes it so using my roth account doesn't seem worth it. It's one thing to be able to repay it within a year, it's another if it only allows me to repay it $5K a year, 25K loan to myself would mean 5 years of repayment... Not worth it.

401k loans are an alright option. but most require that you pay the loan back in full before you can make any changes, so that limits you. personally i would sell off other assets before i would tap into retirement savings. also investigate other types of loans you may be eligible for that do not require a 20% downpayment nor PMI, they exist and they are out there. a lot of credit unions offer loans like this (you do pay a higher interest rate usually, usually somewhere in the 1/4 to 3/8 % more range) if you qualify for membership.

as was stated before, if your wife can roll over her IRAs into one, that should definitely be the first thing you worry about, unless her current one is garbage.

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We'd only consider using retirement funds if we could pay it back within a year or less.

side note about turning a home purchase into a future rental. be 100% sure it will be worthwhile. you spend 300k on a house (60k down, 240k mortgage) and your montly payment (depending on taxes) will be in the 1500 a month range. if you can get 2k montly for rent on that house after you move out, i would say that is the bare minimum margin you would want to maintain (things break, you need to deal with a tennant, you may have months where its empty or your tennant squats as you evict). also remember when you sell a home (future profit taking) you will pay income tax on the difference in price between buy and sell, regardless how much you spend fixing, unless you have lived in the house as your primary residence for 2 of the last 5 years. you live in NOVA, and depending on location and house size, my example is quite low.

it is very hard when you buy a house to live in AND be an investment property. a house you live in isn't an investment, it is a cost for you and your family to live. an investment is something that makes you money. while you live in a house it DOES NOT make you money. now if the correct opportunity presents itself, then jump on it. but likely it will be a distressed home that needs remolding that can fufill both roles as primary residence AND future investment. a ready to move in home is almost always at top dollar, and top dollar ain't going to make you money as a rental, especially in NOVA where housing prices are astronomical, and rent is only moderately high for the area, but the cost to buy vs rent isn't great in nova unless you can find a deal.

my advise is don't try to force a place to be an investment and primary residence. you spend a lot of extra money on a house you live in, vs a rental property. you will want nicer finishing than you would put in a rental that will never pay for themselves in an investment property

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We already have a rental property, the goal is to buy another one, we would treat the home as if we were renting it (which we are currently renters anyways) and any upgrades/repairs that didn't need to be done ASAP would be delayed until the house went on the market as a rental so we could write them off.
Any repairs/upgrades would be renter grade stuff. By living in the home for at least a year, we can get a better rate on the loan, buying a investment property falls under investment loans which are a bit higher rate wise.

For me, it's about keeping our cost of living within 1 income. That way savings is always growing, if repairs come up, if need be, we can dip into our savings. The problem with having a $1500,00 payment and $2200,00 rent means paying a lot on income tax. By renting it out for a hundred or two over what we are paying, we get to try to break even on it. As the house gets paid down by the renters, our wealth goes up. It's a long term investment, not an instant one. Think of it as a second retirement plan.

If done right, we get to rent the house to ourselves for 1-2-3 years VS renting from someone else. Once we turn it into a rental, it pays for itself. excluding any major issues or vacancy.

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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By using lets say 25K worth of IRA money, allows us to buy a home 1 year sooner vs renting for another year, the principal paid back to our home would be around $6000.00 That's 24% return on that IRA money. not counting the added write offs from owning the home.

If someone can only afford to do an FHA loan, does that mean they still can't afford the home?

This is about how to best use money to get the most out of it. Paying $2200,00/mo to someone else, isn't that great of a plan.

Man, I go out of town for a bit and everyone answers my threads for me

You've indicated a desire to avoid an FHA loan, but I believe there are conventional loan options that are available (w/ PMI) at higher than 80% LTV. Initially purchasing as a primary residence opens up finance options considerably.
Good luck with your deliberations.