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rachierach · Nov 28, 2007, 08:50 AM

My employer allows me to borrow 50% of my 401K. I am using this towards a purchase of a new home. However, the 50% may not be enough towards the down payment. Would I be able to borrow the 50% and start the loan today and lets say next week, borrow the remaining money in my account as a hardship withdrawal? I would rather get penalized the 10% on 1/2 of my balance than the entire amount. Also, with only 1 month left in the year, my tax advisor can tell me what I would have to pay for this 401k Withdrawal, right?

ScottGem · Nov 28, 2007, 09:08 AM

You don't qualify for a hardship withdrawal. The question is whether your plan allows for inservice withdrawals. If it does then you may be able to specify the amount to be withdrawn. Obviously you don't want to process a withdrawal until after the loan since that would reduce the amount available for loan.

But I would still not recommend a withdrawal until you have exahausted all other possibilities. Really paying 30% or more for the use of the money is throwing away money.

ebaines · Nov 28, 2007, 01:30 PM

I'd be surprised if plan rules allow you to have a loan outstanding for 50% of the acount value and then let you take a withdrawal. I would bet that if you try it at least some of the loan amount will become immediately due - in order to keep the loan balance at 50% or less of the amount left in the 401(k). So if you don't pay it back immediately, it would be considered a distribution and subject to income tax plus 10% penalty. I must admit I have been unable to locate any definiitve information on this scenario, but I got to believe the IRS wouldn't let you get away with this "trick."

AtlantaTaxExpert · Nov 29, 2007, 10:19 AM

Both ScottGem and Ebaines make good points. Ebaines is correct when he asserts that the IRS will NOT let you get away with this "trick".

Try REAL HARD to come up with a different source of funds for the rest of the down payment.

Do you have an IRA? You can access those funds (up to $10,000) and waive the 10% Early Withdrawal Penalty under an exception allowed for IRAs ONLY. You will still have to pay tax on the withdrawal, but a new house may be worth it.