401K Question

[momof3disneyholics]

My hubby has put in his two weeks notice at a parttime job he has had for 6 years. We are going to cash out his 401k that he has with them. We are going to use the money to put a down payment on a house. I am trying to figure out the timeline in which we will get the money. The Benefits dept told us that after his two weeks are up, they will send him a letter with the options of what to do. Then he mails it back and then they send it off. Sometime after that I guess he will get the money. Does anyone know how long that will usually take, and also it is through Charles Schwab so is there anyway that we can get it sooner?

 

[bicker]

Even within the same plan administrator there could be a wide variety of experiences. It sound like you're trying to structure your home purchase around very tight timing, which in this case sounds rather risky.

Have you checked into the penalty for withdrawal? Are you sure your home purchase will/won't exempt you from the penalties/unpaid taxes?

 

[KelNottAt]

Yikes!
Taxes and major major penalties were the first things I thought of when I read about cashing in a 401k.
But, after pausing a second to think, maybe purchase of the primary residence is one of the few allowable uses. Assuming it is, I'd allow 90 days to receive the funds from Schwab, after HR submitted the form.

Good luck!

disclaimer: I'm not a 401k expert, I just read the Plan updates that I get from my employer.

 

[bicker]

Purchase of a primary home might exempt you from the penalties (there are actually additional conditions on this), but not from the taxes.

 

[momof3disneyholics]

Nope, I checked. With the company he worked for, we are still going to get the penalties. The house I am renting right now is being sold and the new owners are wanting to move in. I am in a lease with a management company until March. The management company told me that they might have to move me to another place. I don't want to move until my lease is up in March. When I moved in, I paid the pet deposit for my dog. After problems with my dog running out, I took him over to my inlaws and got a cat. I figured I paid my deposit so I would be fine. Well, the owners are saying that I am breaking the lease by having a cat, even though the lease just says "small animal" does not specify, but the management company wrote on the bottom of the lease "has a small dog". So, the management company is telling me that the owners are saying I am "techinally" breaking the lease, so if they push it with their lawyers, we might have to move. But, the management company tells me that if I move to another one of their properties, I will have to pay for my move, even though they are forcing me, and I will have to repay my pet deposit and possibly my deposit. So, I am looking into buying a house and trying to get this whole ordeal behind me. But, I don't know what I am going to do because the management company said that I might have to move as early as Dec. 1 (they told me this Friday). But, they also said that they have lawyers too and will try to fight it with me and by the time everything is resolved it might be March anyway. I am sooooo stressed about this, because I don't want to move to another place in this neighborhood because of problems that I have had there, I just want to move away from there. I don't know what to do, because if something happened where they told me I have to move, I don't have the time or money to move before I get this money from the 401k. I cannot understand how they can do this when I have a lease, and this is so petty. I am lost.

 

[janette]

If there are penalties & taxes you will usually lose a minimum of 25% of the money you have in the 401K if you withdraw it. You can move it to an personal IRA or other retirement account with no penalties or taxes. I'd consider other options before using the 401K even borrowing from another 401K if you have that available.

There are many financing options for a mortgage, some that need no deposit. Have you talked to a finance person? Check around and see what they can offer you and the options you would have without the money from the IRA.

 

[bicker]

In many cases, you can actually borrow the money from your 401k, paying the interest to yourself.

 

[chrissyk]

In many cases, you can actually borrow the money from your 401k, paying the interest to yourself.

This money becomes immediately due if you leave the job, though. It sounds like the OP's husband is going to leave this job.

 

[Feralpeg]

You can usually roll the money from a 401K over to an IRA. You might be able to take a loan against the IRA and avoid the withdrawal penalties. If you decide to roll it, you must have the plan administrator do it. If they cut a check to you, even if you plan on putting it in an IRA, you will be liable for the taxes and early withdrawal penalties.

 

[marybet]

I think you need to see a lawyer about your lease. It has to give you rights too. You don't have to move because they send you a letter, you could make them evict you and that takes months and by them the lease is up and you have found a place to live. It shouldn't cost to much to have a lawyer go over the lease and tell you your rights, and it will be money well spent.

 

[LoraJ]

You should roll the 401k over to someplace where you can take a loan off of it.

 

[Dan Murphy]

You can not borrow from an IRA, only withdraw. Taxes are always due on any distribution of pre-tax deferrals/earnings and/or employer contributions/earnings from a 401(k) or regular IRA. 10% penalty, if younger than age 59 1/2, is always due for a distribution, not used for several very limited events (home purchase not among them). Taking a hardship withdrawal from a 401(k) is only permitted if maximum loan has already been taken. A loan is not necessarily due immediately, if terminated, IF the employer and the plan and permit the loan to be continued to be repaid after termination. If not permitted, then the loan does need to be paid back; if it is not, it will be defaulted, triggering taxes and appropriate early withdrawal penalties. Taxes, for withdrawals, are paid at your marginal federal income tax bracket (not necessarily the 20% mandatory withholding rate), plus state income tax bracket (if state has tax due on qualified plan distributions), plus 10% premature withdrawal penalty tax (if younger than age 59 1/2)

(not to be taken as financial nor tax advice)

 

[Ronda93]

We are going to cash out his 401k that he has with them. We are going to use the money to put a down payment on a house.

Everyone needs shelter, but this is a really bad idea. You'll lose almost half the money. It will be penalized and treated as income. 28% federal (a guess, but it's a big bracket - if the amount is really big it could kick you up a notch), 10% federal penalty and state income tax - 6% (another guess).

Don't forget to make the estimated tax payment, too. You're going to be short enough that the IRS will penalize you for underpayment if you wait to pay the amount in April (there are ways this wouldn't apply, but it's likely to cause another penalty).

I'd wrangle with the landlord before I'd get crossways with the IRS.

 

[twojo21]

depends if he is fully vested & how the law works in your state. you may lose half or more depending on if hes vested or how your state works with cash outs on 401k's some allow up to 10,000 for a home purchase with small penalties, others just have a huge tax penalty period. this is something you should ask his hr department or your financial advisor not a message board.

 

[swea_pea1]

You can not borrow from an IRA, only withdraw. Taxes are always due on any distribution of pre-tax deferrals/earnings and/or employer contributions/earnings from a 401(k) or regular IRA. 10% penalty, if younger than age 59 1/2, is always due for a distribution, not used for several very limited events (home purchase not among them). Taking a hardship withdrawal from a 401(k) is only permitted if maximum loan has already been taken. A loan is not necessarily due immediately, if terminated, IF the employer and the plan and permit the loan to be continued to be repaid after termination. If not permitted, then the loan does need to be paid back; if it is not, it will be defaulted, triggering taxes and appropriate early withdrawal penalties. Taxes, for withdrawals, are paid at your marginal federal income tax bracket (not necessarily the 20% mandatory withholding rate), plus state income tax bracket (if state has tax due on qualified plan distributions), plus 10% premature withdrawal penalty tax (if younger than age 59 1/2)

(not to be taken as financial nor tax advice)

Dan is correct, except that taking a distribution from your IRA before you reach the age of 59 1/2 is exempt from penalties up to a lifetime limit of $10,000 as long as you qualify as a "first-time homebuyer". There is more information on the IRS website. I have copied/pasted the information applicable to your situation (this is from an IRA, not a 401(k) plan):

First home. Even if you are under age 59½, you do not have to pay the 10% additional tax on distributions you receive to buy, build, or rebuild a first home. To qualify for treatment as a first-time homebuyer distribution, the distribution must meet all the following requirements.

1. It must be used to pay qualified acquisition costs (defined later) before the close of the 120th day after the day you received it.
2. It must be used to pay qualified acquisition costs for the main home of a first-time homebuyer (defined later) who is any of the following.
1. Yourself.
2. Your spouse.
3. Your or your spouse's child.
4. Your or your spouse's grandchild.
5. Your or your spouse's parent or other ancestor.
3. When added to all your prior qualified first-time homebuyer distributions, if any, the total distributions cannot be more than $10,000.

Tip
If both you and your spouse are first-time homebuyers (defined later), each of you can receive distributions up to $10,000 for a first home without having to pay the 10% additional tax.

Qualified acquisition costs. Qualified acquisition costs include the following items.

* Costs of buying, building, or rebuilding a home.
* Any usual or reasonable settlement, financing, or other closing costs.

First-time homebuyer. Generally, you are a first-time homebuyer if you had no present interest in a main home during the 2-year period ending on the date of acquisition of the home which the distribution is being used to buy, build, or rebuild. If you are married, your spouse must also meet this no-ownership requirement.

Date of acquisition. The date of acquisition is the date that:

* You enter into a binding contract to buy the main home for which the distribution is being used, or
* The building or rebuilding of the main home for which the distribution is being used begins.

Note that you have 120 days rather than the normal 60 to rollover a distribution taken for purposes of buying a house if the deal falls through.

I'm not recommending this course of action because I think retirement planning is very important, but I thought I could clear up that misconception. As others have mentioned, you should seek professional advice before you take any action. Good luck!