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ab3000 · Feb 13, 2008, 09:34 PM

I know I know. Its terrible and I shouldn't. However I am only 26 and have $25,000 in a 401k from a former employer. I would like to use the money for a down payment on a house. It is not a first home purchase though. I was also fired by the company that the 401k is with and I have heard something's stating I could use it with less penalty because of this. What are the rules? Do they actual check to see if you paid a bill or whatever? My new company I start with at the beginning of next month and has a very good 401k plan where they match your contributions. My thought is the house, which is a foreclosure and $80,000 less than tax assessed value, and my new 401k should give me enough to get back going fairly quickly. However if I have to pay $10k in taxes I will just start renting again. I just got divorced (another waste of $20k) and am getting going again. Do they pull taxes and fee's up front or do I worry about it for next years taxes?? Thank you, thank you

ebaines · Feb 14, 2008, 07:11 AM

Originally Posted by ab3000

I know I know. its terrible and i shouldn't. however I am only 26 and have $25,000 in a 401k from a former employer. I would like to use the money for a down payment on a house. It is not a first home purchase though. I was also fired by the company that the 401k is with and I have heard somethings stating I could use it with less penalty b/c of this. what are the rules? do they actual check to see if you paid a bill or whatever? My new company I start with at the beginning of next month and has a very good 401k plan where they match your contributions. My thought is the house, which is a foreclosure and $80,000 less than tax assessed value, and my new 401k should give me enough to get back going fairly quickly. however if i have to pay $10k in taxes I will just start renting again. I just got divorced (another waste of $20k) and am getting going again. do they pull taxes and fee's up front or do i worry about it for next years taxes??? thank you, thank you

The rules are that if you take the $25K withdrawal you will owe regular income tax on that and also an additional 10% penalty. Having separated from service from your former employee doesn't help you - it's only if you're 55 years or older that separation causes the penalty to be waived. If this was your first house purchase, you could have rolled the 401(k) from your former employee to an IRA, then taken a withdrawal of up to $10K from the IRA - you are allowed to take withdrawals up to $10K from an IRA for a 1st time home purchase without penalty, but not from a 401(k). But since that's not your situation, this is all moot.

If you do go through with this, the plan admin will process the withdrawal and automatically withhold 20%, leaving you a check for $20K. Depending on your income level 20% may or may not be enough to satisfy the total income taxes due - remember that the $25K may push you into a higher tax bracket. Also, depending on your state, you will owe income tax to them as well. Finally, the 10% penalty is not automatically withheld - you have to pay that yourself when you file your taxes next year. So all in all when you withdraw $25K you should only use about $15K tops, and keep the rest back for the additional taxes and penalties you will still owe.

ScottGem · Feb 14, 2008, 07:22 AM

As Ebaines indicated, the cost of taking a 401K disbursement at this time would be from $7500-$10000. Do you really think its worthwhile to throw that much money away?

As I see it you have 2 viable options. I get the impression you have not received the distribution from your previous company yet. So an IRA rollover may still be an option. The other option is to rollover the distribution into your new company's plan then take a loan against it. But taking the distribution and paying the taxes and penalites is NOT a viable option In my opinion.

ab3000 · Feb 14, 2008, 07:29 AM

Thank you both. I'm going to say F it and just do it. I love the house and my new job is a pretty big pay raise. So the taxes might be heavier but I can make up for it I think. Thanks again. Oh yeah I'm in Fairfax VA and I was $70k and I'm going to just into 6 figures

ScottGem · Feb 14, 2008, 07:31 AM

If you want to throw away money, throw some my way.

ab3000 · Feb 14, 2008, 07:34 AM

Its only money. I get this trust when I'm 30 and can replenish it then. Also again this is a damn nice bachelor pad I'm talking about

ScottGem · Feb 14, 2008, 07:44 AM

No one is saying you shouldn't get the pad, Just that you shouldn't throiw away money doing it. You do have other alternatives.

excon · Feb 14, 2008, 08:13 AM

Hello a:

There is, of course, the possibility that the house will appreciate back to its former level and you'll make all that loss back and then some. (It's also possible for beautiful chick to pick me up today too, but I digress.)

If you buy, the interest rate you'll pay today will probably never, in your lifetime, be lower. Plus, you'll also be able to deduct interest which you can't do if you rent. And you'll be living in a really cool place.

Yes, it's a gamble. But, with the markets in shambles EVERYTHING you do now is a gamble.

Scott is just a much more conservative dude than me. Can you tell?

excon