[feldi]

Is it better to borrow money from a 403b or to take the withdrawal of $10,000 allowed to first time home buyers?

[ebaines]

Best advice is to do neither - if you can possibly swing the down payment without dipping into your 403(b) that would be best. But to answer the question-- better to take a loan, because if you withdraw the money you will have to pay income taxes and also the 10% early withdrawal penalty. When you take a loan you do not have to pay taxes or penalties. However, you need to be reasonably confident that you will be able to pay the full amount back into your 403(b) and that you will stay with your employer until it is fully paid back, because any outstanding amount that's still unpaid when you leave employment is reclassified as a withdrawal rather than a loan. This immediately triggers taxes and the 10% penalty. So just at the time when you are most likely to be strapped for cash you will have to come up with a fairly large amount of money for the IRS.

[feldi]

But there is no 10% penalty for first time home buyers.

[ebaines]

But there is no 10% penalty for first time home buyers.

Sorry, but there is indeed the 10% penalty for early withdrawals from 401(k) or 403(b) accounts for 1st time home buyers. This is a common misconception. Making a withdrawal for 1st-time home purchase is considered a valid "hardship" by the IRS such that your plan is required to allow you to make the withdrawal. But being a "hardship" does not eliminate the early withdrawal penalty. There is added confusion because "hardship withdrawals" from IRA plans for home buyers are exempt from the 10% penalty. Hence it is often advantageous to roll monies from a 401(k) or 403(b) account to a rollover IRA, and then take a hardship withdrawal from there so as to avoid the penalty. But that is not usually an option for active employees.

Following is the list of exceptions for early withdrawals from a 401(k) or 403(b) that are not subject to the 10% penalty - note that being a first time home buyer does not make the list:

1. Made as part of a series of substantially equal periodic payments (made at least annually) for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary (if from a qualified retirement plan, the payments must begin after separation from service) - this is known as a section 72(t) withdrawal.

2- Made because you are totally and permanently disabled (he or she cannot engage in any substantial gainful activity because of a physical or mental condition, and a physician determines that the condition has lasted or can be expected to last at least a year or can lead to death).

3- Made on or after the death of the plan participant or contract holder.

4- From a qualified retirement plan (other than an IRA) after your separation from service in or after the year you reached age 55.

5- From a qualified retirement plan (other than an IRA) to an alternate payee under a qualified domestic relations order.

6- From a qualified retirement plan to the extent you have deductible medical expenses (medical expenses that exceed 7.5% of your adjusted gross income), whether you itemize your deductions for the year.

7- From an employer plan under a written election that provides a specific schedule for distribution of your entire interest if, as of March 1, 1986, you had separated from service and had begun receiving payments under the election.

8- From an employee stock ownership plan for dividends on employer securities held by the plan.

9- From a qualified retirement plan due to an IRS levy of the plan.

[feldi]

I heard this from Carmen on ON THE MONEY on CNBC. The following is from Kiplinger.com. Are both these sources incorrect?

Penalty-free IRA payouts for first-time buyers. As a further incentive to homebuyers, Congress offers to waive the normal 10% penalty for or first-time homebuyers who withdraw from traditional IRAs before age 59½. At any age you can withdraw up to $10,000 penalty-free to buy or build a first home for yourself, your spouse, your kids, your grandchildren or even your parents. That $10,000 is a lifetime limit, not an annual one.

To qualify, the money must be used to buy or build a first home within 120 days of the time it's withdrawn. And, get this, you don't really have to be a first-time homebuyer to qualify. You're considered a first timer as long as you haven't owned a home for two years. Sounds great, but there's a serious downside. Although the 10% penalty is waived, the money would still be taxed in your top bracket (except to the extent it was attributable to nondeductible contributions). That means as much as 40% or more of the $10,000 would go to federal and state tax collectors rather than toward a down payment.

[ebaines]

feldi - the article you quoted reinforces precisely what I wrote earlier -- the article is about withdrawals from a IRA account, not a 401(k) or a 403(b) account. But your question was about withdrawing from a 403(b), and so I responded that such a withdrawal is subject to the penalty. If instead you meant to ask about withdawals from an IRA, as I have already noted you can do that for purposes of a home purchase without the penalty.

[feldi]

Thanks for the clarification. That really is confusing.

[gingerrogers77]

Hi Feldi:

Depending in which state you reside there are many different programs that will give you first time buyers assistance! First check this out before you make any drastic decisions... Borrowing money to removing money from investments is a very bad idea. Although, agencies will tell you differently because you pay the money back and eventually pay yourself interest on the loan. Depending the age of the investment you may have to pay penalties to withdraw it! We have a friend who withdrew her money a total of $14,000.00 and has been put on probation for a year. Not to mention, lost a large sum to penalties being her age was not appropriate for withdrawal.

Please check with your local state and government programs for first time buyers or if this is the second house after a 2-3 year period this will benefit you tremendously. DO NOT use existing money unless it is within your checking/savings accounts!

Also, if you are a single parent the programs are even better for assistance! Low income qualifies even a married couple! Unfortunately, we missed the bud by $77.00 believe it or not but with our new President we will get a tax credit of $15,000.00 that we do not have to return to the government. A big change from the 2008 purchasers who must repay the money they were awarded!

Majority of the time FHA mortgages will require at least 3.5% down or nothing depending on your credit history!

A little wordy I know because we once thought this might be the right way and found it wasn't at all!

God Bless You & Good Luck :)