| Borrowing from 401k. What are my options? |
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drew65
First Time Poster
Cash: $ 0.25
Posts: 1
Joined: 09 Aug 2005
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| Borrowing from 401k. What are my options? |
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Hi,
I changed jobs about a year ago, and currently have money in my previous employers 401k plan. I know I'm able to roll this into my current employer's plan or get a rollover IRA.
I'm trying to scrape together a down payment towards the purchase of my first home, and would like to use this money ($16000) from this 401k account. Is there a way I can borrow all of this money without penalty? If I roll it into my new employer's plan, I assume I can take out a loan, but I've read in some places that I can only borrow half of the balance.
I've also read that if I had a rollover IRA, I could withdraw up to $10,000 towards a new home purchase.
Which of these is a better option, and is there any way I'd be able to either withdraw or borrow the entire balance without penalty?
Thanks,
Drew
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Tue Aug 09, 2005 6:06 am |
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efflandt
Senior Member
Cash: $ 80.45
Posts: 401
Joined: 25 Apr 2005
Location: Elgin, IL USA
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Talk to the plan administrator for the 401k involved to see what their plan allows. But I doubt if you can borrow from a 401k where you are no longer employed.
That brings up one point. If your current job is not really secure, anything borrowed from your current 401k would be immediately due and payable at the time employment there was terminated. And while you pay the interest to yourself, it is NOT tax deductable and might be more or less than the borrowed money could have made invested in the 401k.
Unless you have bad credit, interest may be lower for a home loan and tax deductable if you itemize. If you do need an extra $10,000 for a down payment, check if there is a time limit after a rollover before you can draw it out.
Note that anything payable to yourself, instead of direct trustee to trustee transfer, will be subject to 20% withholding. Anything not rolled over within 60 days (including the missing 20% withholding) would be subject to tax and 10% penalty. So if you closed out the $16,000 401k and had it sent to you, the check would be for $12,800 and you would need to add $3200 to that during rollover within 60 days to avoid tax or penalty. The withholding does not apply for trustee to trustee transfer.
You can search http://www.irs.gov/ for info about IRA and other retirement plans. But 401k's have some rules set by their specific plan and plan administrator.
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Tue Aug 09, 2005 7:19 pm |
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MattL
Senior Member
Cash: $ 46.85
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Joined: 25 Jun 2005
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I'm not sure if you can do a direct rollover to a ROTH IRA, but I would look into that option. You could roll it into the ROTH and pay the tax on the money (no penalties). You are allowed to use money from your ROTH for a first home purchase.
If you can't rollover directly to a ROTH you could do a rollover to a traditional IRA and then do a conversion.
I would check with an accountant about those options.
It would be much better to pay only taxes on the money than taxes plus penalties.
Debt Elimination
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Wed Aug 10, 2005 12:43 pm |
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efflandt
Senior Member
Cash: $ 80.45
Posts: 401
Joined: 25 Apr 2005
Location: Elgin, IL USA
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I do not think you can directly roll a 401k into a Roth IRA. However, if you transfer the 401k to traditional or rollover IRA and then convert it to a Roth IRA, you would have to pay tax on the conversion and would not be able to withdraw it for at least 5 years without additional 10% penalty.
But if 401k is transferred to traditional or rollover IRA, you can take up to $10,000 out of that to build or buy first home by just paying tax without 10% penalty. See http://www.irs.gov/publications/p590/ch01.html#d0e7872 and after reading that scroll down to First Home.
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Wed Aug 10, 2005 11:42 pm |
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