borrowing from 401k

memaof4August 29, 2009

we have applied for a mortgage and since we have no large savings for a down payment we were going to use gift funds as the down payment(fha loan)but the mortgage company is requiring us to use money from my husband's 401k-it is with hartford-my question is will all plans allow you to borrow, does the employer have any say so in the matter and as far as paying it back we were going to pay it back with the 8000 first time buyers credit which will be a refund as we are going to amend our tax return-thanks for your input as this is the only thing holding us back from our first home

ps we only need 6000

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live_wire_oak

If you can't save 6K for a down payment, you certainly aren't in a safe position to borrow from a 401K. You are in a very vulnerable oveall financial position. Borrowing from your retirement will only make it worse. Homeownership costs a LOT more than just the monthly note, especially if you buy one of the forclosed ones that needs work. If you can't afford to save 6K in real life without having those extra costs already, then you can't afford home ownership right now. Period. Get help from a planner and get on a financial plan that includes building up your savings and see where you are a year from now.

BTW, you do understand that a tax credit is NOT a check to you, but deducted off of your gross income, right? All it does is reduce your taxable income. It's not an 8K check to you.

    Bookmark   August 29, 2009 at 9:28AM
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creek_side

BTW, you do understand that a tax credit is NOT a check to you, but deducted off of your gross income, right?

Tax credits are applied against the tax due, not the gross income. Deductions are applied against the gross income. Some tax credits do amount to a check to the citizen. Some don't. It depends on how Congress wrote the law behind the particular credit.

In either event, it has to be filed for.

According the linked site below, this particular credit does amount to a check from the government.

Here is a link that might be useful: Tax Credit

    Bookmark   August 29, 2009 at 10:29AM
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brickeyee

Is your job VERY secure?

If you leave the job for ANY reason, you have 60 days to pay the 401k loan in full, or the balance is charged as a premature withdrawal with a 10% penalty, and also added to your income for the year with taxes due in April.

Borrowing from 401ks is subject to the terms of the plan.

Not all allow loans.

    Bookmark   August 29, 2009 at 10:53AM
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jdm_56

memaof4,

My wife and I took a 401(k) loan from my plan over 11 years ago - some of it for home improvement projects. Here is my advice:

1. Look long and hard at doing this. Even back then, most retirement "experts" recommended taking a 401(k) loan as a last resort. It worked out for us, but the economic times were clearly different back in 1998 compared to 2009.

2. Thoroughly understand your husband's company 401(k) plan on loans. I worked for a megacorp (still do), and what I quickly learned is, if you have questions that are not the 'norm', few individuals in the Human Resources group know the answer. The private company that administered (and still administers) my megacorp's benefits (including the 401(k) plan) was not much help either. I think by the time I was done investigating my company's 401(k) plan for loans, I probably knew more about it than the folks who were supposed to know.

3. Check to make sure you can take a loan out. My company's plan allows for 2 types of loans - general purpose and for purchasing a home. In both cases, loans are limited to $50,000. AND the amount I can borrow is the lesser of 50% of my 401(k) balance on the day the loan is made or $50,000.

4. Repayment terms depends on the type of loan. A general purpose loan must be repaid within 4 years. A home purchase loan must be repaid within 25 years. My company's 401(k) loan plan does allow for paying off the loan all at once - but there are special steps that must be taken.

5. All of the other advice that the other posters have give applies.

The only thing in your post that I find surprising is the mortgage company is "requiring" the 401(k) loan. They might strongly encourage it; but I do not believe they can "force" you to, so I would check on this.

Anyway, good luck.

    Bookmark   August 29, 2009 at 2:04PM
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sylviatexas1

good grief.

On an FHA 203b loan, you now have to have 3.5% of your own money;
you can get a gift for the closing, or you can ask your sellers to pay closing, but you have to have 3.5% of your own money.

All you're doing with your 401k is "borrowing" from yourself;
it is your money.

Your employer doesn't have a say in it, but you'll have to go through a process to get the funds out, as 401k money can be withdrawn only for certain uses;
buying a home is one of the allowable uses.

You need to check with the program administrators to find out an estimated time line;
don't know how it is now, but several years ago, I had a sale that was put back for several weeks because the committee only met once a month.

You might also check on using the tax credit for the down payment;
I haven't had to do one like this, but my loan officer tells me it can be done.

You'll need to amend your 2008 tax return, which your tax preparer will know how to do, & consult with your loan officer.

Best luck, & don't get discouraged by the lectures people sometimes feel obligated or entitled to deliver.

    Bookmark   August 29, 2009 at 4:28PM
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brickeyee

"Best luck, & don't get discouraged by the lectures people sometimes feel obligated or entitled to deliver."

While the tax code allows 'hardship' withdrawals under limited circumstances, the plan may not (and cannot be forced) to allow them.

You will have to talk to HR, and possibly wade through the exact plan documents to see what 'features' your plan contains.

If matching contributions are made in company stock, there can be further restrictions placed on withdrawals of the matching funds.

It is a place to be VERY careful since there are rules and restrictions at a number of different levels.

States may not follow the same rules as the IRS.

    Bookmark   August 30, 2009 at 11:02AM
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jdm_56

Not all 401k plans allow loans, that is why some of us responding to this message say the original poster needs to review her husband's actual 401k plan for its specific requirements and details. While the IRS does allow all 401k plans to offer loans, it says that the specific company plan must allow loans. Here is a link to the IRS page on 401k plans: http://www.irs.gov/retirement/sponsor/article/0,,id=151926,00.html.

So, the original poster's company could very well have some "say" over 401k plan loan withdrawals

Memaof4, I know that I stated in my earlier post that most experts say to tread carefully when taking out a 401k loan. Well, here is a link to a March 2009 report from the Federal Reserve Board that says perhaps taking out a 401k loan is not as "bad" in all instances as some financial experts make it out to be. Link: http://www.federalreserve.gov/pubs/feds/2009/200919/200919pap.pdf

Again, get the specifics of your husband's 401k plan, make your decision, and good luck.

    Bookmark   August 30, 2009 at 4:24PM
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memaof4

thanks for all the advice-i hope that my husbands plan will allow a loan-as far as using the tax credit for the downpayment you still have to have the 3.5percent of your own money-we actually have about 4500 saved at home but the loan officer said it had to be verifiable with documents and our little money box isn't exactly that-i will be sick if his employer prevents this-thanks too for the well wishes and i will let you know how it goes

    Bookmark   August 31, 2009 at 12:57AM
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fruitgirl

Open a savings account and put the 4500 in it. Then you have proof. And why do you have that much sitting around at home, anyway? Any little bit of interest you can get is still EARNING you something. All it's doing at home is collecting dust.

    Bookmark   August 31, 2009 at 7:20PM
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sylviatexas1

Cash on hand used to be called "mattress money" & was acceptable as long as it made sense;
ie, if you are part of a culture that doesn't use banks, if you can write a letter stating how you saved the money & why you don't use a bank (ex overdrew your bank account & you can't open a bank account until you pay off his old rotten debt, etc).

don't know if that still works, but you might ask your loan officer.

Best luck!

    Bookmark   September 1, 2009 at 11:25AM
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Billl

Normally, I would be 100% opposed to someone borrowing from a 401k for a down payment. In your case though, it may make sense. The reason is that you are going to repay the money immediately.

Of course, that doesn't mean buying a house is a good idea for you at this point. Home ownership is more expensive than renting. If you haven't been able to save much without home expenses, it might be impossible for you to keep your head above water with one. Besides for taxes, higher utilities, general upkeep etc, things break. If you don't have any money set aside for when the water heater breaks, you can get yourself in trouble pretty easily. Before you go through with a purchase, it would be a great idea to sit down with a trusted friend or relative (or financial adviser) and go over some of the nuts and bolts of what everything is going to cost.

    Bookmark   September 1, 2009 at 11:44AM
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sylviatexas1

OP *has* money; it's just "mattress money".

& in my area rentals are at a premium;
you really *can* buy cheaper than you can rent.

Also, rents go up when the economic tide rises.

Buying a home when
prices are low &
interest rates are low &
the govt will pay you $8000 to do it &
you can write off the interest on your tax returns &
the rates are fixed so that your payment remains pretty stable (principal & interest remain absolutely the same over the term of the loan; tax & insurance increases are the only expenses that can make the payment rise)...
sounds pretty smart to me.

    Bookmark   September 2, 2009 at 5:17PM
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cordovamom

I agree with you Sylvia -- same in my area, rents are almost as expensive as owning. If you can buy while prices are low, interest rates are low and govt is giving you an 8k credit, I'd say do it. You have to understand that it is entirely possible that the home may not appreciate for several years and may in fact still depreciate. So be in it for the longterm and not with the hopes of selling in a few years for a profit. I wish my 4th child was in the position to buy right now, but with at least 3 more years in his PhD program that can't happen. His luck of course will be that in 3 years interest rates are up, housing prices are up and no 8 k from the govt!!

    Bookmark   September 2, 2009 at 8:04PM
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sue36

You should call whoever administers the 401k to get these questions answered. At my former employer you were allowed to borrow from the plan and DID NOT have to repay it if you left their employ as long as you set up automatic monthly payments from a bank account. You were also allowed to re-pay early. Call the plan administrator.

    Bookmark   September 3, 2009 at 11:54AM
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