Roll over 401k to IRA or Withdraw for First Home Down Paymen
My and wife is just starting her career and we were living in another state for her internship and she had a full time job for about a year before we moved back to our home state. Her 403b at her old job is vested just under $5000 so it can't remain there. It will either roll over to an IRA or she can withdraw it. We would roll over to her new job retirement plan but she can't start one until she has been employed there for a year.
We are hoping to purchase our first home in the next 2-4 months. We will probably have enough money saved by that point for a 5% down payment/closing cost but since the retirement fund is so small and it would be nice to have extra money for the home buying process would anyone recommend just withdrawing it and starting fresh with retirement saving at her new job after we are settled in our new home?
Sun Nov 10, 2013 4:24 pm
oldguy Senior Member
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A common progression of a retirement account is to move the 401k to an IRA at each job change - and ultimately, at retirement, your last 401k is moved to that IRA. Several reasons - (1) IRAs usually have better choices that 401k's, (2) an IRA is not tied to a company that you may have worked for 20 years ago and has since gone out of business, (3) you have your retirement account in one place where it is easily managed, (4) you avoid the severe taxes & tax penalties.
If you cash out a $5000 401k you pay a $500 penalty pus the Fed & State taxes - so it will probably cost about $2000 (leaving you with a $3000 net). Conversely, if you move the $5000 to an IRA and allow it to compound tax-deferrred for 30 years (at the historical 11%/yr) it will be $110,000. And if you get in the habbit of never disturbing the longterm comounding effect and continually invest $5000/yr for 30 yrs you'll have $1,100,000.
It means way more to your far-future to not allow your million dollar plan to derail just to free up $3000. It will be way more cost-effective for you to make a smaller DP, add $3000 to your 30-yr mortgage, and protect your future wealth.
Sun Nov 10, 2013 5:13 pm
Wino Senior Member
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Joined: 03 Aug 2012
I second oldguy's ideas. Retirement savings are for retirement. The 403B and similar accounts should be touched only to avoid bankruptcy or to retire. Since neither of these is the case, you should roll over the funds. I suggest you go to Vanguard, Fidelity, or T Rowe Price to find zero fee online options.
Note that I said "avoid bankruptcy." I did not say "delay bankruptcy." If you're going to go bankrupt anyway, then leave the funds in the retirement account. Often, they are protected from bankruptcy proceedings. This protection is one of the advantages of investing in such retirement vehicles. I don't know if this is true for every State, but I believe it is true for most States.
Mon Nov 11, 2013 1:41 am
coaster Senior Advisor
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Joined: 11 Oct 2005
You're saying it would be "nice" to have the extra funds, but not absolutely necessary. That $5000 will disappear once it's in your pocket (actually, quite a bit less than $5000 ends up in your pocket, as noted above). "Starting fresh" means losing not just the $5000 you already have, but the growth you wouild have otherwise earned between now and when you get the account back up to $5000. And not only that growth, but all future growth is reduced by what would have been earned on that growth. So, in the end, you lose quite a bit more than $5000. No, I certainly can't recommend it, either.
Mon Nov 11, 2013 5:42 am
clydewolf Senior Member
Cash: $ 50.25
Joined: 27 May 2012
Re: Roll over 401k to IRA or Withdraw for First Home Down Pa
quote:Originally posted by Toddk6444 My and wife is just starting her career and we were living in another state for her internship and she had a full time job for about a year before we moved back to our home state. Her 403b at her old job is vested just under $5000 so it can't remain there. It will either roll over to an IRA or she can withdraw it. We would roll over to her new job retirement plan but she can't start one until she has been employed there for a year.
We are hoping to purchase our first home in the next 2-4 months. We will probably have enough money saved by that point for a 5% down payment/closing cost
Where are you buing, in the internship state or in the home state?
How long is her internship?
Where will you reside after the internship?
5% is barely sufficient for a down payment on a home. You would be far better off to delay this purchase.
but since the retirement fund is so small
The retirement fund was much smaller at one time, when the first contribution was made.... Why wasn't that taken out then, I am sure it would have been nice to have for whatever was in front of you then....
As Oldguy pointed out, putting the $5,000 into an IRA and doing nothing, that $5,000 will grow to $110,000 in 30 years. Spending that $5,000 now, it can not be replaced in your retirement account.
$110,000 sounds good to me.
Mon Nov 11, 2013 7:22 pm
Cash: $ 381.25
Joined: 09 Feb 2009
I remember when I was in my late twenties and I had 10k invested in my 401k and 3k in a Roth IRA. I was stupid and young and I made bad choices with buying everything I wanted on credit, so I cashed out both funds, paid 40% taxes and lost out on all of that wonderful compound interest. I wish someone would have been there to tell my I was being an idiot and to not touch but rollover the funds from my 401k. You never get those years back.. I have learned from my mistakes the hard way, I'm giving you my wisdom from my real life experiences and will tell you never to withdrawl the funds from your investment accounts unless its to prevent a bankruptcy as Wino stated.
Risk comes from not knowing what you're doing. (Warren Buffet)