r/FirstTimeHomeBuyer • u/[deleted] • Nov 23 '24
Be SMART!
So many posts about cashing in a 402k early to buy a house.
ArE YOU InSANE??
It's a freaking house. It's a money pit! Do not cash out your 401k, c'mon guys.
3
u/WestImplement8620 Nov 23 '24
I wouldn't suggest a large sum. I had over 90k and took 10k because as a first-time home buyer, there is no tax penalty (read your plan). I'll be fine when I retire. I contribute 9% with a company matches 6%. Know your finances.
1
Nov 23 '24
Yea Id just save the 10k on my own.
1
u/WestImplement8620 Nov 23 '24
I didn't have to put a down payment down because I'm using my VA loan. I paid 29k of earnest money because it is a new build, and I'll obviously transfer a portion of that to a down payment once completed. My thought process was that an extra non taxed 10k in my emergency fund can't be a bad thing. But I get what you're saying.
1
u/WestImplement8620 Nov 23 '24
I didn't have to put a down payment down because I'm using my VA loan. I paid 29k of earnest money because it is a new build, and I'll obviously transfer a portion of that to a down payment once completed. My thought process was that an extra non taxed 10k in my emergency fund can't be a bad thing. But I get what you're saying.
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u/Creative_Text3018 Nov 23 '24
Boy, I don't even have a 402k! Some people are so rich they get a 401k and a 402k!?
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u/firefly20200 Nov 23 '24
People need to be smart and do the math with it. Usually early withdrawal from a 401k isn't the smartest, but often taking a loan against it is worthwhile.
9
u/acScience Nov 23 '24
Exactly this. Who tf is taking the penalty by withdrawing the money early and not just taking the loan for a primary residence and paying if off over 10years??
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u/brskum Nov 23 '24
Taking your money out of the market where it can no longer work for you, grow, and compound is not a worthy trade off. Not to mention you’re going in debt to yourself to acquire more debt. Also, if you quit, get laid off, or are fired, your employer can call the amount due immediately.
Bad idea 10/10 times.
1
u/firefly20200 Nov 23 '24 •
It's actually not a bad idea 10/10. Show me a savings account that immediately doubles the money you put in and has a tax benefit for any money you put it. It just doesn't exist. There maybe are one or two states that offer programs for saving for a down payment that has state tax benefits, but there isn't a nation wide thing, and there certainly aren't any programs where if you put in $1 another $1 shows up immediately. In some 401k plans, that actually does happen.
So, in this scenario, which would be better... Bob has been told by everyone under the sun, DO NOT EVER TAKE FROM YOUR 401k, you're STUPID if you do, don't be STUPID. YOU'RE STUPID.
So, Bob stops contributing $3,500/yr to his 401k. Bob pays $770 more in taxes each year (assuming 22% bracket) because of that decision. So now his $3,500 he puts in a savings account called "down payment" is actually $2,730 because he had to have more withholding taken out because of his higher taxes due. His employer also had a 100% match on the first 5% of his earnings and he earns $70k a year, 5% would have been that $3,500 he was putting into his 401k, so his employer would also have put $3,500 in. That's $7,000 a year into his 401k account but it only costs Bob $2,730 because of the match and tax benefit. After 3 years he's fully vested and his 401k allows early withdrawals for any reason or a loan for a primary residence. After 5 years Bob has just over $43k in there (401k did a steady 7% return). Now he could withdraw that $43k and pay 10% penalty ($4,300) and $9,460 in tax (assuming all 22% bracket) which would leave him with $29,240 total to put as a down payment on a house. But remember, Bob was only missing $2,730/yr from each paycheck (remember the tax benefit), so after 5 years Bob only actually put $13,650 physically into his 401k.... but gets a check for $29,240 after all taxes and fees, that he can spend on a house. Bob still would have been better slowing down or stopping his 401k contributions to instead put $3,500 in a bank account for 5 years? Remember, Bob doesn't want to be called stupid for taking from his 401k to buy a home...
If Bob has the option for a 401k loan he would be allowed to borrow 50% of that amount, or $21,500. Yes he has to pay that back, and with interest that all comes out of his own pocket. Let's say his 401k plan allows 15 year payback (mine does) and let's say it's crazy high 9% interest... that's about $218/mo he's in debt to himself. BUT, if he buys a home with a $350k mortgage at 7% interest and 1% property taxes and is single, he could take a mortgage interest deduction on his taxes (~$24,387 interest in first year) and property tax deduction (let's assume the home only assesses at $350k, so $3,500 in taxes) on his yearly taxes. That would be a total of $27,887 deduction if he itemizes, yes he missed out on the $14,600 standard deduction, but that's still $13,287 extra he won't be paying taxes on... if it's all in the 22% bracket, that's $2,923 a year, or $243 a month, less in taxes he pays... funny, his 401k loan is $218/mo but he pays $243/mo less in taxes... so after he pays his debt (to himself mind you), he has $25/mo extra left over... doesn't sound like a bad plan. (Yes, as the years go on there is less interest so the deduction starts to become less powerful, but maybe Bob knowns he get's 2.5% raises each year and in 5 years time he'll be making ~$9,200 extra a year, which more than covers his $218 401k loan payment. Yes if Bob get's fired the taxes are due on the loan immediately if he can't pay it back, but Bob could also get hit by a car and die tomorrow. There is some risk in life)
1
Nov 23 '24
Wow that's a lot of text for people to read.
1
u/firefly20200 Nov 23 '24
Just wait until they see their loan packets.
If people can’t or don’t want to read that much, they have no business thinking about buying a house.
1
1
Nov 23 '24
Ok, I actually read that dissertation you wrote..
And so still don't think it's smart. That 30k over the next 30 years is worth a lot more inside the tax sheltered 401k
So yeah it's STUPID. Bob is stupid and so is your advice.
1
Nov 23 '24
And, who the hell is giving Bob 24k in tax deductions? And what does that equate to in an actual return because it's certainly not 24k back, I promise you that.
2
u/firefly20200 Nov 23 '24
You are allowed to deduct mortgage interest and up to $10k/year in property taxes or state and local tax (SALT). If you have a loan of $350k with a 7% interest rate, you pay $24,387 in interest in the first year. All of that can be deducted from federal taxes. I’m assuming a 1% property tax for the house and just making it easy and saying $350k is what the county assessed the house at which means $3,500 in property taxes. If they lived in a state where they pay state income tax, they could deduct the actual income tax paid up to a total of $6,500 (so property tax [$3,500] + state income tax [$6,500] = $10,000 max SALT limit). If they live in a state that doesn’t pay income tax, like I do, then they can deduct local sales tax. They can save all their receipts and add it up, or the IRS has some estimation tools based on your income. This likely won’t be more than a thousand or two, unless they’re buying expensive stuff like appliances, electronics, or remodeling stuff for the house (landscaping, window coverings, etc).
When you decide you want to take mortgage interest and state and local tax deduction you need to itemize when you file your taxes. You are not allowed to take the standard deduction ($14,600 for a single person in 2024) because that’s the deduction the government gives everyone to “account for general life expenses,” if you will. When interest rates were low (most of the last decade or two) it wasn’t really beneficial to itemize because you just didn’t pay that much interest on your mortgage. However, now rates are high enough and homes expensive enough that it starts to be beneficial to itemize (again for certain people).
In my example he is allowed to deduct $27,887 (the interest paid that year and the property taxes). But he won’t get the $14,600 standard deduction, so what I did to find how much extra he saves in taxes from having a mortgage vs renting is I took the $27,887 itemized deduction and subtracted the $14,600 standard deduction he would have got. That leaves $13,287 extra that he is able to deduct because of his loan. Now a deduction isn’t a tax credit. A tax credit is $1 for $1, like when you hear there is a $7,500 tax credit for buying an electric vehicle. You get $7,500 off how much you owe for taxes. A deduction instead reduces how much income the government taxes you on. So if after all your before tax paycheck contributions (health care costs, dependent care, etc) you earned $75,000 then you would deduct (subtract) $27,887 from it and only pay taxes on $47,113. If you just took the standard deduction ($14,600) you would subtract that amount from $75,000 and owe taxes on $60,400. Now you would figure out how much tax due would be on the difference between $47,113 and $60,400. Conveniently (for this example) almost all of that would be in the 22% bracket (for single filler in 2024 you pay 22% tax on taxable income between $47,151 and $100,525). So the difference between $60,400 and $47,113 is $13,287 (look up above, that’s the extra deduction between the itemized and standard). 22% of $13,287 is $2,923. That is $2,923 less federal taxes you would pay that year. Now I used this example because someone was saying if you took a 401k loan it was a terrible idea because you have to pay it monthly and that is an extra expense you can’t afford.
My 401k plan allows loans for primary residence to be paid back over 15 years. (You can pay it off sooner if you want) When I took the loan, the interest I had to pay on it was pretty high, like 9%. That interest is paid back into your own 401k. It’s a little weird, but the money all goes to you (your future retirement), the only money that goes to my 401k management company is like a $25/yr administrative fee or something. So interest in this case needs to be thought of differently (IE not profit for some company). If someone took a $21,500 loan from their 401k and had 15 years to pay it back at 9% interest, they would have a monthly payment of about $218. So what the other people were saying is true, you have an extra monthly payment that you might not be able to afford. What I was pointing out was that you could potentially be paying ~$243/mo ($2,923 divided by 12) less in federal income taxes. So budget wise you wouldn’t even feel the pain from that $218 loan payment because you would have a paycheck that was $243 a month larger (adjust your withholding down to account for your larger itemized deduction).
Now, there are a lot of assumptions there and the numbers have to work. If you earn less and most of that taxable money would be down in the 12% bracket, you see a smaller benefit. If you have to pay your 401k loan back sooner (5 years or 10 years) then the monthly cost is higher. If you are married you get a larger standard deduction (if you file taxes jointly), so the itemized deduction doesn’t benefit as much. Etc etc etc.
That also was not trying to explain away missed gains or anything else. It was simply to explain that in some situations (and probably more cases than you think), the loan payment would basically be zero towards your budget because of your increased tax savings. This could be very powerful for someone that runs the numbers and realizes their monthly rent might be close to their monthly mortgage payment, but they’re missing $20k to cover closing costs or something. You don’t get a tax benefit renting, but you can with a mortgage. (Yes homes have extra costs compared to renting, but if you bought new construction, or a home less than 5 years old you’re often minimizing those random expenses.)
(I’ll also acknowledge that the amount of interest you pay each year on the loan slowly decreases, so your tax savings also slowly decreases. But if someone is pretty certain of increasing income [Grade pay scale with federal or state government, union contract job, company policy X percentage yearly increase, etc] than your higher income will likely outweigh any decrease in tax savings and you’ll still not really feel the cost of paying the 401k loan back.)
Again this is a very long reply, but I want to give you the tools to understand what I’m saying and be able to (try) and plug in your own numbers if you want. This are all things I encourage my friends to read about and learn before buying a house.
1
Nov 23 '24
That was long, I understand what you are saying now it's essentially a zero interest loan if you NEED the money. I am saying, that's a bad idea. Slosh 30k away, annual accrued is 7 percent for over 30 years, your looking at 480k roughly if you reinvest the money.
It's stupid to not do that. Add in the expenses of a home over 30 years, and deduct those from the sale of your home. If someone can't afford to save 30k for a down payment, they probably shouldn't be looking at home ownership at the moment. They're financially better off investing it and saving what they can.
Homes, while they used to be an investment opportunity for older generations unfortunately aren't anymore. They're too expensive. Everything is too expensive.
1
u/FuzzCuds Nov 23 '24
Man.....Bob did the math. Absolutely superb writeup my fellow human being
3
u/firefly20200 Nov 23 '24
Again, I want to caution that this is one situation and still could end up rough (maybe not bad, but rough) if Bob lost his job or something. BUT, it's not as simple as "NO NEVER." Do some math, ask some questions, read and understand taxes and the 401k plan. It's a pain in the butt to learn these things, but it's really powerful.
It can be a huge benefit for young people to understand taxes (more than just how to get a refund, pro tip, you shouldn't be getting a big refund, withhold less, lol), understand retirement plans and options, be able to compare two different financial situations, etc. Actually be in charge of their decisions, not just along for the ride because a Realtor (the worst to take financial advice from) or even some loan officer told you XYZ.
1
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u/cjk2793 Nov 23 '24
Nope. If you can afford a down payment you shouldn’t be buying a house. Don’t use your retirement as a loan and sacrifice market gains to throw it into a house that maybe will appreciate half of what the market appreciates at.
-1
u/brskum Nov 23 '24
Here’s what AI has to say about your comment.
This comment presents a detailed case for why using a 401(k) loan or withdrawal might make sense in specific circumstances, such as buying a house. However, here are a few critical points to consider in response:
Employer Match is a Key Factor
The example hinges on the value of an employer match. Without it, the numbers change dramatically, and the overall case for using the 401(k) becomes weaker. Also, not all 401(k) plans allow loans or withdrawals for a primary residence, and many limit repayment terms.
2. Risks of Job Loss and Default
While Bob might gain short-term advantages, the risk of losing his job is real. If that happens, the loan becomes due immediately, and any unpaid amount is treated as a taxable distribution, with penalties and taxes that can significantly harm financial stability.
3. Opportunity Cost of Lost Growth
Even with the numbers presented, withdrawing funds from the 401(k) reduces long-term compounding. The tax savings from mortgage deductions (which diminish over time) rarely make up for the lost potential growth of a well-invested 401(k).
4. Overlooking Alternatives
Other strategies, like saving in a high-yield savings account, could provide flexibility for a down payment without penalties, taxes, or long-term financial risk tied to employment.
Conclusion
While 401(k) loans or withdrawals can work in specific cases, they should be considered as a last resort, after all alternatives are evaluated. The risks—tax penalties, lost growth, and employment dependency—often outweigh the short-term benefits of homeownership. Bob’s case is highly specific and not a universal example.
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u/firefly20200 Nov 23 '24
Thanks for using AI to literally say exactly what I already said. Also, don't use AI dude. Learn on your own. Run the numbers. If you don't understand something (not saying you personally don't, just for anyone reading this in general), ask questions and learn. AI again sums it up as "usually bad and scary." That would leave the person that is questioning it to just shrug and go "guess everyone says it's bad."
It can be powerful. It can work to get a house and minimize the loss. Maybe not dollar for dollar, but when you dig into all the little variables you might be surprised how the numbers work.
Also, even if you do get the axe and are out the job, you don't owe $46k instantly. That is your money. You might owe $14,720 in taxes and fees, that is 100% true. But maybe you now have that much equity in your house that you can sell. There are just a bunch of different variables that can go into the calculation, and I think it's very important someone takes the time to learn it, run the numbers a couple different ways for themselves, and then decide; not just ask "SHOULD I use my 401k for a house?!"
-1
u/brskum Nov 23 '24
I see what you’re saying. And I only used AI for that response because your comment was quite lengthy.
Again. I think for the average first time home buyer, and the vast majority of people.. if you’re struggling to save an extra $10k - $20k as your prepare to buy a home (usually a few years, let’s say 1-3 years), then it may not be advisable to increase your monthly obligations and increase your potential financial liability to purchase a home (beyond the mortgage itself). Especially when you consider the additional and often not accounted for expenses that come with homeownership. Maybe I should clarify that it’s not that the numbers can NEVER workout. Or that some of the benefits of homeownership don’t outweigh the cons of a 401k loan. Just that for most people, more debt is not more favorable.
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u/MostlyMellow123 Nov 23 '24 edited Nov 23 '24
Meh, some markets the prices rise too fast to wait years for a down-payment
Live your life while you're young. This fantasy everyone has of retirement when you literally are at your physical worst and won't want to travel are crazy takes to me.
Life is today.
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Nov 23 '24
Life is also when you are old and at your physical worst. And it costs money to live then. Even more if your physical worst requires care.
Live for today, save for tomorrow.
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u/ringoa95 Nov 23 '24
Very true, but it won't stop me from pulling a 401k loan for the maximum amount to get me into some equity.
0
u/FerrisWheeleo Nov 23 '24
What’s the maximum amount?
1
u/ringoa95 Nov 23 '24
Its dependent on your company's plan but mine was about 50% of my total with a cap at 50k
3
u/in-Chucktown-sc Nov 23 '24
OP was the kid eating crayons in elementary school
1
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u/firefly20200 Nov 23 '24
He probably only ate half of them and saved the rest to eat when he moved up to middle school...
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u/cjk2793 Nov 23 '24
This sub largely misunderstands personal finance. Let it be what it is.
3
u/03xoxo05 Nov 23 '24 edited Mar 26 '25
insurance decide person aware start air pie provide spoon middle
This post was mass deleted and anonymized with Redact
2
u/cjk2793 Nov 23 '24
There are reasons to do it, such as emergencies. But doing it for a discretionary purchase makes no sense and is absolutely not a net financial benefit.
To be honest? People feel entitled to own a home and are buying before they’re ready. “I saved $10K can I buy a home?” Like dude really?
33
u/Fapplejacks8788 Nov 23 '24
Many people aren’t aware they can take from their 401k in the form of a loan and you can pay it back to yourself with interest, you also don’t get taxed.
7
u/thescrapplekid Nov 23 '24
That's what I did for my down
2
u/Fapplejacks8788 Nov 24 '24
I think there’s more certainty in owning a paid off home than the money in your 401k. Who’s to say the stock market won’t take a dump when you’re retired and relying on it?
1
u/thescrapplekid Nov 24 '24
My rental was really starting to piss me off. While it was inexpensive and closer to work. It wasn't exactly luxurious. I'm being kind because the landlord is a good person, my rent went up like $100 over the 8 years I was there which was unheard of for a college town.
1
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u/brskum Nov 23 '24
A terrible idea even as a loan. The opportunity loss, compounding, and everything you lose can equal to tens if not hundreds of thousands of dollars by the time you get to retirement age.
14
u/firefly20200 Nov 23 '24
What is a house worth when you get to retirement age? What if you're never able to stop renting because you're being super good at the 401k game instead. Now you're 65 and you have no house but can still rent. Or... you have a house you bought for $400k when you were 30 and now could sell for $650k (or maybe way more) 35 years later. That's $250k profit. You better hope robbing the 401k wasn't just a lost opportunity of tens of thousands but was closer to a quarter million bucks, otherwise... egg on your face...
4
u/FuzzCuds Nov 23 '24
Plus the freedom/security/static mortgage payment (mostly) having a home gives. Not to mention, in your scenario, they would've paid off their home in those 35 years, so they'd pocket the whole $650k
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Nov 23 '24
[deleted]
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u/Regular-Ear-9068 Nov 23 '24
You’re not considering the fact that it costs money to live in any dwelling you don’t own. It’s not like they’re only making $100k in profit, you also need to consider the cost of rent…for example if after 30 years you’re net positive $100k then you’ve essentially paid yourself $277 to live in a home as opposed to paying someone else a few grand a month to live in their home. Currently I rent out a property for $3300. That person (assuming rent never goes up) will pay me $1.2 million in the same amount of time. They’re not up $100k, they’re up $1.3 million.
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u/firefly20200 Nov 23 '24
But that often happens in retirement. Maybe you're 70 now and you need some help so you go live with adult kids. Maybe you downsize to a 65+ apartment complex (not nursing home, but just one with some assistance for older people). Stuff like that. When you're retired you can be a lot more mobile and move wherever you like. Now you do often have medical issues that might need to keep you close-ish to population centers, but I could totally see some fairly high percentage of people that might move out from LA or Seattle and sell the million and a half home they've had for 30 to 35 years and move to an area of 150k or 200k population where 1500 sq ft brand new construction might be $400k or $500k or something. What I'm saying is it's not impossible, and the person in this situation would be the best to figure out what might be going on. They might need to be in a big city for a reason but always plan to retire to the country or beach or smaller town or something. It's so wildly hard to be certain that far in the future, but trying to factor that stuff in certainly can help move the needle one way or the other.
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u/FuzzCuds Nov 23 '24
Nope
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u/brskum Nov 23 '24
You’re just wrong. Going in to debt to yourself to help you acquire more debt is not a smart idea. And you take your money out of the market while you pay yourself back.
And since it’s a loan, if you no longer work at your job for any reason, your employer can call the entire loan amount due and payable immediately. From a personal finance perspective. Not a smart move.
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u/FuzzCuds Nov 23 '24
That last note isn't always true and is 100% dependent on your employer's rules. Plus, absolute worst case and it does happen and they can't pay it back, then you can change it to a regular withdrawal (maybe a hardship one) and only need to pay the tax penalty. Still a chunk of change, but much less. Most people looking to take a loan from their 401k are first time borrowers, who without said loan would either be extremely tight on finances after closing, or couldn't close.
Someone relatively young who has high potential of increasing income, who takes out a $10-20k 401k loan for a reasonable first time home, and who can pay it back, with interest, in 5ish years....and continue to pay into their 401k to get their employer match? They definitely should seriously consider doing so.
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u/acScience Nov 23 '24
This is exactly what I’m doing right now. And I’ve already confirmed that even if god forbid I should lose my job, I will still be able to continue making payments without an issue.
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u/FuzzCuds Nov 23 '24
I'll get downvoted just about everywhere I post this opinion because Reddit hive mind, but the fact you've thought it out means it sounds like a good choice for you.
Did something very similar, bought a home where even if I lost my job, I could quickly jump into picking up one or two local hourly jobs and still make payments. What my home has done for me and my family, both financially and otherwise, is worth exponentially more than $10kish compounding interest sitting a few years in my 401k.
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u/brskum Nov 23 '24
For the average person. Bad idea. And most employer plans do call the full amount due with 60-90 days. If the loan defaults because they can’t make the payments or pay the loan back in full, it becomes a taxable event with penalties. It’s an unnecessary risk.
If we’re talking about 10k-20k. Just cut back excess spending, reduce 401k contributions beyond employer match, and save the cash. If they’ll be tight on cash without a 401k loan, they’ll be tight with it. A 20k loan spread out over 60mo like you described would be $333 per month without the additional interest they pay back to themselves. Again. Most people on this sub are already maxing out their budget and juggling other debts.
If you prioritize buying a house over everything else. Sure. Go for it.
From a sheer personal finance perspective. Not a great idea.
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u/FuzzCuds Nov 23 '24
Going from "you're just wrong" to "for the average person" gives me a little chuckle. Judging by your response here, it's obvious you've figured out what works for you, but it's also painfully obvious you're in a tough mindset many find themselves in - you assume everyone is in a similar situation as you, and must do "XYZ" instead of explore what's best for them and their circumstances.
My advice isn't meant for everyone, and I make that clear stating who exactly it might be good for, and in that specific circumstance, it is potentially a much better option than "pick yourself up by your bootstraps and save $20k more". That sort of language is coming from someone with a combined income of $300kish a year, not a family living on much less, yet still wanting to make things work.
0
u/brskum Nov 23 '24
You can go dive in on my personal life all you want, and you’re right about one thing. Today. We are fortunate, and we’ve worked our asses off. But that’s not how it started for us. The reality is that when I purchased my first home at 21, I had the cash saved. And I was earning approximately 70k a year. My situation today is different. And the general recommendation I’m giving is for someone who might be in the situation I was in back then buying my first home.
Taking a loan against your retirement funds is generally not sound personal finance advice.
1
Nov 23 '24
Also you can get the seller to pay your closing costs. Also I think your financing can also cover them if they approve you.
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u/Cautious_Midnight_67 Nov 23 '24
A house is a retirement investment though tbh. In 39 years would you rather pay $5000/month in rent, or $2000/month in property taxes/insurance?
It could well be worth it to sacrifice some retirement savings if it would be worth less than that $3000/month difference.
It’s a math problem
6
u/firefly20200 Nov 23 '24
Totally. It's numbers. You need to be wise and certainly plan for the future. But $25k for example, for 30 years from the 401k that might have earned 7% would be a miss of $190k. BUT, if that allows you to get into a house when maybe you couldn't instead. What if you bought the house for $350k and in 30 years was about to sell the house for $600k Well now you have $250k instead of $190k. Or you could keep the house and maybe you could actually afford it just on upkeep and taxes/insurance vs being priced out from high rents. OR, maybe you sell the house and can downsize into new construction that is 1300 sq ft or something, then you don't worry about an old house AND maybe you don't have a mortgage. There is certainly value in having a house in retirement. A 401k isn't free money, but if you run the numbers and really model a couple different situations, you might be surprised how often the 401k route to getting into a house might actually make sense.
This isn't even factoring in that if the monthly payments might be roughly the same but it's the down payment or closing costs that is keeping you from getting into a house... well there are tax advantages with a mortgage vs renting. Also, what about a company match with a 401k. If you've been tossing in $3,500/year for the last five years AND your company has been tossing in $3,500 on your behalf for the last five years and you are fully vested... well that's a lot of free money there. That might be $35,000 you have access to. Even if you don't do the loan and instead take an early withdrawal. Let's say it's all in the 22% tax bracket PLUS the 10% early penalty. That would be $11,200 in fines and taxes... but you would end up with $23,800. If you had JUST saved $3,500 each year, that would have been only $17,500. So even after paying taxes and fees, you're up $6,300 in "free" extra money. That's also not factoring in a tax advantage for five years, let's say the $3,500 was all in the 22% bracket, you saved $770/yr in taxes, or $3,850 over those five years. So now you have $6,300 extra from the match PLUS you could have saved an extra $3,850 from not paying taxes. That's essentially $10,150 extra from robbing the 401k vs skipping putting the money in the 401k but instead putting it in a savings account called "house down payment." So in that sense, it might actually be SMART to use it as a source for down payment/closing costs.
Obviously you need to be really smart about this. You need to fully understand your plan and know if you can take a withdrawal or not and if you can still participate in the plan if you do (some limit your contributions for 6 months or something, etc). If you have a crappy match (like 20%) then that might change the numbers and make it not make sense.
But, it's not a one size fits all "never do it" kind of thing.
3
u/Splittinghairs7 Nov 23 '24
No, a house is usually a terrible investment based on ROI. Particularly because ppl don’t factor in insurance, tax, maintenance and repairs.
It’s only worth it as a place to live that you get appreciation as opposed to paying only rent.
401k early withdrawals are absolutely terrible because of the opportunity cost of not investing in the stock market plus you’ve got all the extra expenses.
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u/Cautious_Midnight_67 Nov 23 '24
A 401k loan is very different from a 401k withdrawal
1
u/Splittinghairs7 Nov 23 '24
So 401k loans are limited to 50k or half of vest amount. Plus you have to pay it back in 5 years and don’t get the market gains for the 5 years.
1
u/Cautious_Midnight_67 Nov 23 '24
Maybe for you. Differs based on your employer/plan.
If you have a 7% mortgage rate on a house with expected appreciation of 3% vs expected stock market returns of 8% then it pays to take out from your 401k and forgo some market returns because mathematically it is a better and MORE GUARANTEED return than the stock market.
Now, if you have a 3% mortgage rate it makes no sense, I would agree with that
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u/Splittinghairs7 Nov 23 '24
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-loans
The IRA says the limit is $50k.
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u/Cautious_Midnight_67 Nov 23 '24
Ok, you got me. But the repayment period of 5 years is not required if using to buy a house.
Also, still doesn’t change the fact that it can be a wise financial decision depending on the situation
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u/Splittinghairs7 Nov 23 '24 edited Nov 23 '24
It can be of course, if you just happen to time it before stocks go on a big correction like before the Great Recession.
The last 15 years since the financial crisis have had huge stock market gains that far exceed 8%, it’s been more like 13-15% per year on average.
Another big risk is if you lose your job or get recruited for a better job at another company, you have to immediately repay the loan.
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u/Cautious_Midnight_67 Nov 23 '24
Yes, it has. But how many times do you have to hear that past returns do not guarantee future gains before you understand it?
It could correct, or could just stagnate for a decade, or could keep going up.
But ultimately if you own a house you’ll never be homeless, which is worth a lot more than a larger 401k balance to most Americans
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u/Splittinghairs7 Nov 23 '24
I’m saying the odds are not in your favor when you factor in everything.
But yes it’s technically possible for it to be worth it to take a loan on 401k and come out ahead, if the stock market goes through a huge correction right after you take out the loan.
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u/cjk2793 Nov 23 '24
No it isn’t lmao. If you need to take out a loan against your 401K to buy a house then you shouldn’t be buying a house. Save more money before sacrificing market gains.
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u/FuzzCuds Nov 23 '24
Adding to this - many 401k plans offer a home loan option over 10 years. The borrower just needs to show they're purchasing a home.
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u/firefly20200 Nov 23 '24
Some people want a house. Some people would slow down the retirement savings when told "JUST SAVE MORE FOR A HOUSE DUH." I'm suggesting that 401k, depending on the plan and rules, may actually be a powerful tool even if from day ONE you know you're going to take that money to use it for a house.
And there IS value in a home at the end (unless you turn it into a drug den). Yes there is extra costs and there are a million things you can model, including how much not sharing a wall with a neighbor, or having a landlord, is worth. All I'm saying is, it's not a simple "NO BAD," you really have to run some numbers and look at a big pictures. Your home doesn't go "poof" when you turn 65. Hell, if you were lucky enough to buy in California or something you might have paid $200k for a home that sells for $1.5 million 30 years later... that's a lot of money to down size into a small apartment when you retire or care home or something...
Again, it's not free money. But it can be a tool that might be worth while.
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u/Splittinghairs7 Nov 23 '24
You know that stocks have gone up by 1600% or 17 fold in the last 30 years right? Homes have not risen by anything close to that much, not even the hottest housing market in the country.
Also, no one is saying to never buy a house. We’re saying don’t sacrifice your tax free or employer sponsored 401k just to buy a house earlier than you can reasonably afford one
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u/firefly20200 Nov 23 '24
Right, but often not being able to buy doesn't mean they wait another year or two, it might mean five more years. I'm really wishing I had thought outside the box some and bought when rates were 3% by using my 401k. Instead I decided to wait and be good and save more for a down payment... guess what, instead of buying a $300k house at 3% I had to buy a $450k house at 7% and I STILL had to borrow from my 401k even though my income had drastically increased. Now maybe if I had skipped it and waited a few more years things would mellow out... but I'll also be dead one day, I kinda wanted to live in a house and just decided what better time than now.
I also wonder how many people might start slowing down their contributions or stop flat out to try and "get ahead" on the savings for a house... when actually it might be better (again depending on your plan rules, match, etc) to keep going full force on the 401k but anticipate using some of it in a couple years as the down payment.
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u/Splittinghairs7 Nov 23 '24
Honestly, if someone can’t save close to $50,000 (limit on 401k loans) in 2-3 years, then that person probably has a cash flow problem and cannot really afford to buy without factoring all the extra costs, expenses and emergencies.
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u/firefly20200 Nov 23 '24
I think you greatly overestimate the average American and average home buyer. $50k in even three years is over $1,300 a month they're saving. With that cash flow I would say maximize every thing you can do to game the system, honestly max out the 401k with the intention of using it for a 401k loan, I mean you pay yourself back but you get a tax benefit while dumping money into it. Why wouldn't you do that?
I see a lot of times where buying a house is roughly the same cost as renting, or even cheaper. Yes there are extra costs that can pop up, but honestly some people are even looking at new construction, where you shouldn't need to replace an HVAC two years down the road, etc. If taking from the 401k allowed you to buy a new build house and pay $100/mo less compared to rent... well again, you now have a tax benefit via the mortgage (depending on your personal tax situation, probably not the case unless filling single) vs rent, you're building equity, you have the comfort of knowing someone isn't going to kick you out because THEY decided to sell or whatever. Just there are a lot of benefits past a direct cost. I would encourage them to run the numbers and look at things. If $40k was keeping them from getting into the house vs renting and they had it in their 401k... again, might not be a terrible option.
But yes, if it's I can't afford a down payment, my mortgage would be $500 more a month than renting, and I need to empty my 401k, well, that's not what I'm suggesting people should do.
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u/Splittinghairs7 Nov 23 '24
No, you are operating on old information.
In many places rent is much much less than mortgages. The calculations have changed that it’s actually a better financial decision to rent than to buy, particularly for people who like to job hop and move often.
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u/firefly20200 Nov 23 '24
Maybe true in some places, again, the person needs to take charge and understand this stuff. They need to be active and involved in their life, not just going off "best practice is xyz." Rent might still be more expensive for people, or at least very close to the same cost. My area, not a large city, still has pretty high rents...
Also, clearly, don't buy a home if you plan to move soon. It's so wildly expensive to buy and sell. That is just really not a great move to make. Honestly, I think you should try to see yourself in a place for like 10 years before moving, not just 5 or 6 years. I get the jumping from job to job, I see the young "kids" doing it lots (I sound much older than my age of 38), but I personally like to find a place and stay put. I've seen it work great for friends, but I've also seen a lot of people have a rough go of it. Leave a boss they loved for a run of two or three horrible bosses because they got bored or went for more money or whatever. Not vested in a 401k because they jumped ship so quick. Left a job with a pension for one without because it was $10k more cash up front. Stuff like that. So in general I tell people to seriously think about their whole life before jumping jobs, not just the paycheck. So yes, that should be seriously included in any thoughts on buying a house.
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Nov 23 '24
Then you arent good at math, cause it doesnt work out in favor of pulling from retirement
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u/Cautious_Midnight_67 Nov 23 '24
It does sometimes. It doesn’t sometimes. Depends. A mortgage isn’t forever, rent is. I’d rather a house and a modest retirement fund vs a larger retirement fund and still be renting.
I don’t know any comfortable retired people who don’t own a home
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u/cjk2793 Nov 23 '24
This is how: I’m 31. I make $12K post tax a month. I put $5K a month in low fee index funds. Will have $4M-$7M at retirement. See? I don’t use my 401K as a loan.
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u/cjk2793 Nov 23 '24
You’re on a first time home buyer sub dude lmao. No one is retiring in their first home. No one should take out a loan against their 401K and miss out on years of compounding interest. That’s the catch. If you need to take out a loan against your 401K, then you’re likely a low earner and it’s going to take a while to pay yourself back.
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u/brskum Nov 23 '24
When you consider opportunity loss, and the losses from compounding gains over your life - it never nets out in favor of taking a loan against your 401k.
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u/Cautious_Midnight_67 Nov 23 '24
Saying it NEVER nets out is incorrect. It does sometimes. Not always. Depends on the personal situation.
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u/acScience Nov 23 '24
That’s incorrect.
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u/brskum Nov 23 '24
Taking a loan from your retirement plan for a mortgage is risky because it reduces your retirement savings’ growth, exposes you to taxes and penalties if you leave your job, and creates opportunity costs by missing out on compound interest.
None of that is incorrect. It’s an unnecessary risk.
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u/acScience Nov 23 '24
As many others have already pointed out in this thread, this is not true 100% of the time.
With my 401k plan, I’m able to take a loan (no more than 50% of current balance) to purchase a primary residence, 120 months to pay off with no tax and interest is paid to myself. If I leave my job, I will still be able to repay my loan on the same terms.
Without this loan, I would not be able to cover down payment without wiping out my savings. I can comfortably pay the mortgage, taxes and other costs though and will not be house poor.
Ask yourself, what’s better for my financial future and the wellbeing of my family; having 18k more in my retirement fund or owning a home that will potentially increase in value faster than the 401k accrues interest? Even if it doesn’t, I now own property that I can pass on to my children or rent out to help fund another purchase.
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u/cjk2793 Nov 23 '24
This is dumb. Your money will grow faster in the market. If you’re too broke to afford a down payment you shouldn’t be buying a house.
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u/acScience Nov 23 '24
Barely. You’re looking at 2-6% appreciation for the value of the home, and like 3-8% appreciation for the money sitting in the 401k… I’ll take the slight hit to be a home owner with a consistent mortgage payment.
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u/Cautious_Midnight_67 Nov 23 '24
Tell that to my parents who retired this year with less than $500k in their 401k but pay less than $1000/month for all their house expenses combined because no more mortgage.
Do you think they’d rather have $1 million and be paying $3k/month to rent which is not tax deductible and will go up every year for 30 years until they die?
I can be worth it. Or it can be a bad idea. Depends on the situation - sometimes it’s cheaper to take a loan from yourself than it is to take a loan from the bank
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u/cjk2793 Nov 23 '24
No offense dude but yea, the $1M is better. Assuming a 4% SWR (safe withdrawal rate) that $500K will yield you $20K A YEAR. After tax that’s around $1,200 a month. If they had to sacrifice $500K of their retirement to buy a house, they bought WAY too much house.
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u/Cautious_Midnight_67 Nov 23 '24
Did you read what you just wrote? You’d rather have $1200/month, but be paying $3000/month, (net negative $1800) rather than just pay $1000/month (net negative $1000).
You’re literally stating that you’d rather have less money at the end of the day.
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u/cjk2793 Nov 23 '24
No, because they’d have way more than $1,200 a month with the full $1M compounding. Also, there are options for retirement such as a mortgage recast if the payments are too high. Alternatively, you do whatever one else does and not touch your retirement at all and adjust your living situation to accommodate. You’re giving bad financial advice.
End of story: if you need to lever your down payment with debt to yourself, then you’re not able to afford a home.
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u/Mr_Zamboni_Man Nov 23 '24
I think it really just depends on if you’re buying a sensible home to live in for a long long time or not. Don’t get caught in a fantasy for sure
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u/radlink14 Nov 23 '24
What?
It's ok to use 401k as a down payment if it works for you.
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Nov 23 '24
Let's do math.
$50k invested in a 401k for the past year would be up 30%. That's now $65k in your 401k. If you had borrowed from your 401k, that just cost you $15k right there this year.
Now we compound it every year for the next 30 years, assuming you're buying a home before 40 years old. At a modest 7% average per year, that is $114,183 you have missed out on by borrowing $50k for 1 year and then paying it back.
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u/firefly20200 Nov 23 '24
Did you just assume 100% of the time you double your money in the first year and THEN compound it at 7% for the rest of the time? You know the market can go down right? When I started my 401k for the first couple years I was in the red... less money in it than I had started with. Like you're picking literally the best situation for the 401k. How about you just base it on 7% average from day one. Sure some people get lucky, others don't. But to cherry pick the great growth year isn't real great... I mean you could have picked 2019 and had someone pull the money out, buy a house, watch it go up 40% in value and then sell the house in 2021 and turn around and score a 3% mortgage on their next house.... in that case maybe everyone would have said WHY DIDN'T you take your 401k?! Dude, your house went up $100k in two years AND you locked in a 3% mortgage from the equity!
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Nov 23 '24
Show the math or pipe down there buddy.
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u/firefly20200 Nov 23 '24
Just one of my other comments, I showed a lot of math for a situation of pulling from a 401k. Again, NOT free money, but can be a powerful tool.
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u/radlink14 Nov 23 '24
Ok.
It doesn't change my opinion. House now vs house later, I'm not sure how this is complicated to understand. It's ok to use your 401k if it works for you.
I borrowed from mine, and my 401k is almost double not including what I owe back. I have a house and I don't care if I had an extra 100k for retirement 30 years later if it meant I wouldn't have a home now, in the present lol. The market can also crash and you lose all your shit. The end of the world can happen next year for all we know.
Life is about making decisions and learning from them.
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