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greenfreak
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Member since 9/06 11483 total posts
Name:
greenfreak
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401k to IRA to downpayment?
DH and I may be in a position to have to do something with one of our 401k funds shortly...
I had heard that you could rollover your vested 401k balance into an IRA without penalties upon job termination.
I also heard that you can take 10k out of an IRA to put towards a downpayment of a house, again without penalty. But you would have to pay taxes on it, as if it were additional income.
Has anyone done this? It seems too good to be true to me. The Fidelity website was a little confusing and I'm sitting down with LIHP next week anyway, I just wanted to hear your thoughts.
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Posted 3/8/07 1:53 PM  |
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Prudential Douglas Elliman Real Estate
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RM23
LIF Adult
Member since 5/06 997 total posts
Name:
Rachel
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Re: 401k to IRA to downpayment?
Yes, that sounds about right. You can roll your 401K over at any time to an IRA. You can also each take 10K out of your IRAs to put towards a first home purchase. You will not have to pay the penalty but will have to pay taxes on it.
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| Posted 3/8/07 1:58 PM |
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DRMom
Two in Blue
Member since 5/05 20223 total posts
Name:
Melissa
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Re: 401k to IRA to downpayment?
I thought only for a first time home buyer?
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| Posted 3/8/07 2:18 PM |
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Lisa
I'm a PANK!!!
Member since 5/05 22334 total posts
Name:
Professional Aunts No Kids
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Re: 401k to IRA to downpayment?
I took 10K out of my 401K to put as part of the downpayment on our house. I did not have to pay the 10% penelty on it but did have to pay the taxes (which sucked)
I also think its for 1st time homebuyers only but check with your 401K manager
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| Posted 3/8/07 2:48 PM |
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lorich
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Member since 6/05 9987 total posts
Name:
Grammie says "Lora Gina"
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Re: 401k to IRA to downpayment?
Posted by Lisa
I took 10K out of my 401K to put as part of the downpayment on our house. I did not have to pay the 10% penelty on it but did have to pay the taxes (which sucked)
I also think its for 1st time homebuyers only but check with your 401K manager
We did this too. We didn't roll it over into an IRA like you asked, but we did take money from our 401k towards the downpayment. We will be getting taxed on it, but did not have a penalty - 1st time homebuyer was considered...a hardship.
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| Posted 3/8/07 3:27 PM |
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malone130
LIF Infant
Member since 10/06 126 total posts
Name:
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Re: 401k to IRA to downpayment?
I thought you can take up to half of your 401K without being taxed on it for 1st time home buying?
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| Posted 3/8/07 3:28 PM |
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MST9106
My life:)
Member since 6/06 9589 total posts
Name:
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Re: 401k to IRA to downpayment?
Posted by melijane
I thought only for a first time home buyer?
Thats what we were told by our financial advisor as well. Only if you're a first home buyer, you can do that without a penalty and I believe you have to qualify for the first time homebuyers benefits as well (like your income, credit history, etc.).
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| Posted 3/8/07 3:30 PM |
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greenfreak
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Member since 9/06 11483 total posts
Name:
greenfreak
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Re: 401k to IRA to downpayment?
Thanks ladies. It is our first home, but if there are salary qualifications, that might be a problem.
I've seen first-time home buyer programs that require you make less than 100k combined (which is I think s*cks for someone who wants to buy on LI!), is it about the same amount in order to borrow from an IRA?
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| Posted 3/8/07 3:41 PM |
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MST9106
My life:)
Member since 6/06 9589 total posts
Name:
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Re: 401k to IRA to downpayment?
Posted by greenfreak
Thanks ladies. It is our first home, but if there are salary qualifications, that might be a problem.
I've seen first-time home buyer programs that require you make less than 100k combined (which is I think s*cks for someone who wants to buy on LI!), is it about the same amount in order to borrow from an IRA?
I think you have to fit under the $120K bracket...
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| Posted 3/8/07 3:52 PM |
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lorich
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Member since 6/05 9987 total posts
Name:
Grammie says "Lora Gina"
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Re: 401k to IRA to downpayment?
Posted by greenfreak
Thanks ladies. It is our first home, but if there are salary qualifications, that might be a problem.
I've seen first-time home buyer programs that require you make less than 100k combined (which is I think s*cks for someone who wants to buy on LI!), is it about the same amount in order to borrow from an IRA?
To borrow directly from your 401k there isn't a salary requirement (at least there wasn't for us), but we were taxed...I know you're hoping to put it through an IRA to avoid that, but if that doesn't work you still have the "other option".
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| Posted 3/8/07 3:57 PM |
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chikita315
Love
Member since 8/06 7945 total posts
Name:
M-lo
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Re: 401k to IRA to downpayment?
Posted by greenfreak
I had heard that you could rollover your vested 401k balance into an IRA without penalties upon job termination.
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This is definitely true. I've done this. Just check what your company's rules are as far as how quickly it needs to be done. If you don't do it within their time frame, they will cut you a check as if you were taking the money.
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| Posted 3/8/07 4:31 PM |
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Samson7256
LIF Infant
Member since 5/06 93 total posts
Name:
John
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Re: 401k to IRA to downpayment?
Posted by lorich
Posted by Lisa
I took 10K out of my 401K to put as part of the downpayment on our house. I did not have to pay the 10% penelty on it but did have to pay the taxes (which sucked)
I also think its for 1st time homebuyers only but check with your 401K manager
We did this too. We didn't roll it over into an IRA like you asked, but we did take money from our 401k towards the downpayment. We will be getting taxed on it, but did not have a penalty - 1st time homebuyer was considered...a hardship.
I'm 99% sure that anyone who withdraws money from their 401k, even 1st time homebuyers, will have to pay taxes AND a 10% penalty. Yes a 1st home is considered a hardship, however that rule simply allows you to make the withdrawal, it doesn't allow you to bypass the 10% penalty. If it wasn't a classified as a hardship, then by law you wouldn't even be able to have made the withdrawal in the first place.
ETA: IRA's on the other, do allow 1st time homebuyers to withdraw 10k penalty (but not tax) free.
Message edited 3/8/2007 4:51:08 PM.
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| Posted 3/8/07 4:49 PM |
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MarathonKnitter
HAPPY
Member since 2/07 17374 total posts
Name:
EMBRACING CHANGE
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Re: 401k to IRA to downpayment?
you can borrow your vested 401k from yourself to put towards a downpayment or closing costs on your house. doesn't matter how many homes you've own. if you state it's for your house, they give more time to pay yourself back.
if you DO NOT plan to pay yourself back, that's when you want to take money from an IRA. you'll still have to pay taxes on that amount, but you will not have to pay the 10% penalty.
it all depends on if you want to pay yourself back or not
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| Posted 3/8/07 6:03 PM |
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lorich
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Member since 6/05 9987 total posts
Name:
Grammie says "Lora Gina"
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Re: 401k to IRA to downpayment?
Posted by Samson7256
Posted by lorich
Posted by Lisa
I took 10K out of my 401K to put as part of the downpayment on our house. I did not have to pay the 10% penelty on it but did have to pay the taxes (which sucked)
I also think its for 1st time homebuyers only but check with your 401K manager
We did this too. We didn't roll it over into an IRA like you asked, but we did take money from our 401k towards the downpayment. We will be getting taxed on it, but did not have a penalty - 1st time homebuyer was considered...a hardship.
I'm 99% sure that anyone who withdraws money from their 401k, even 1st time homebuyers, will have to pay taxes AND a 10% penalty. Yes a 1st home is considered a hardship, however that rule simply allows you to make the withdrawal, it doesn't allow you to bypass the 10% penalty. If it wasn't a classified as a hardship, then by law you wouldn't even be able to have made the withdrawal in the first place.
ETA: IRA's on the other, do allow 1st time homebuyers to withdraw 10k penalty (but not tax) free.
We did it...no 10% penalty at all. Just have to pay the taxes. Confirmed...in his plan, in writing, etc. etc.
ETA: and we do NOT have to pay it back either - It's not considered a loan.
Message edited 3/8/2007 6:07:46 PM.
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| Posted 3/8/07 6:07 PM |
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greenfreak
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Member since 9/06 11483 total posts
Name:
greenfreak
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Re: 401k to IRA to downpayment?
We decided to keep the one 401k alone, not borrow against it, and to instead rollover the other 401k into an IRA for use as a DP later.
It seems so silly to me, to pay myself back. Can't I tell myself, that's ok, no need to pay me back. I trust you. 
Thanks again for all the info. 10% adds up, even when you're only planning on using 10k.
Next will be coming up with enough of a DP to avoid PMI and to minimize the closing costs as much as possible. HA! Good luck to us. 
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| Posted 3/8/07 7:27 PM |
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Samson7256
LIF Infant
Member since 5/06 93 total posts
Name:
John
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Re: 401k to IRA to downpayment?
Posted by lorich
Posted by Samson7256
Posted by lorich
Posted by Lisa
I took 10K out of my 401K to put as part of the downpayment on our house. I did not have to pay the 10% penelty on it but did have to pay the taxes (which sucked)
I also think its for 1st time homebuyers only but check with your 401K manager
We did this too. We didn't roll it over into an IRA like you asked, but we did take money from our 401k towards the downpayment. We will be getting taxed on it, but did not have a penalty - 1st time homebuyer was considered...a hardship.
I'm 99% sure that anyone who withdraws money from their 401k, even 1st time homebuyers, will have to pay taxes AND a 10% penalty. Yes a 1st home is considered a hardship, however that rule simply allows you to make the withdrawal, it doesn't allow you to bypass the 10% penalty. If it wasn't a classified as a hardship, then by law you wouldn't even be able to have made the withdrawal in the first place.
ETA: IRA's on the other, do allow 1st time homebuyers to withdraw 10k penalty (but not tax) free.
We did it...no 10% penalty at all. Just have to pay the taxes. Confirmed...in his plan, in writing, etc. etc.
ETA: and we do NOT have to pay it back either - It's not considered a loan.
I'm not doubting that you made a 401k withdrawal without without paying a 10% penalty, but I am doubting that it was done legally. If you read the rules on irs.gov, it's pretty clear that if you are under 59 1/2 and make a hardship withdrawal for a primary residence, you should pay a 10% penalty. I don't see how anyone's plan can overrule the governments tax laws. If you leave your job, then you can roll over your 401k into an IRA, and THEN you can withdraw 10k (lifetime limit) from your IRA for a primary residence. I'm not sure if people are confusing 401k with IRA, but they are treated differently by the IRS.
 Here's some info from the web
The IRS code that governs 401k plans provides for hardship withdrawals only if: (1) the withdrawal is due to an immediate and heavy financial need; (2) the withdrawal must be necessary to satisfy that need (i.e. you have no other funds or way to meet the need); (3) the withdrawal must not exceed the amount needed by you; (4) you must have first obtained all distribution or nontaxable loans available under the 401k plan; and (5) you can't contribute to the 401k plan for six months following the withdrawal.
The following items are considered by the IRS as acceptable reasons for a hardship withdrawal:
Un-reimbursed medical expenses for you, your spouse, or dependents.
Purchase of an employee's principal residence.
Payment of college tuition and related educational costs such as room and board for the next 12 months for you, your spouse, dependents, or children who are no longer dependents.
Payments necessary to prevent eviction of you from your home, or foreclosure on the mortgage of your principal residence.
For funeral expenses and repair of a primary residence.
Hardship withdrawals are subject to income tax and, if your are not at least 59½ years of age, the 10% withdrawal penalty. You do not have to pay the withdrawal amount back.
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| Posted 3/8/07 10:40 PM |
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Re: 401k to IRA to downpayment?
Here's some info from the web
The following items are considered by the IRS as acceptable reasons for a hardship withdrawal:
Un-reimbursed medical expenses for you, your spouse, or dependents.
Purchase of an employee's principal residence.
Purchase of principal residence is buying a house.
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| Posted 3/9/07 6:51 AM |
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Samson7256
LIF Infant
Member since 5/06 93 total posts
Name:
John
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Re: 401k to IRA to downpayment?
Posted by architectnycity
Here's some info from the web
The following items are considered by the IRS as acceptable reasons for a hardship withdrawal:
Un-reimbursed medical expenses for you, your spouse, or dependents.
Purchase of an employee's principal residence.
Purchase of principal residence is buying a house.
You're right, buying a princiipal residence is buying a house..and is considered a hardship...the link then goes on to explain that "Hardship withdrawals are subject to income tax and, if your are not at least 59½ years of age, the 10% withdrawal penalty
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| Posted 3/9/07 6:57 AM |
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riniko
LIF Toddler
Member since 3/06 486 total posts
Name:
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Re: 401k to IRA to downpayment?
I think it needs to be in the IRA for 5 years, or the IRA needs to have been started 5 years ago.
It is for first time homeowners or people who haven't owned a home in 3 (i think) years.
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| Posted 3/9/07 10:18 AM |
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MsG
Should be working
Member since 5/05 2824 total posts
Name:
G
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Re: 401k to IRA to downpayment?
Posted by riniko
I think it needs to be in the IRA for 5 years, or the IRA needs to have been started 5 years ago.
It is for first time homeowners or people who haven't owned a home in 3 (i think) years.
I thought the same thing
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| Posted 3/9/07 10:26 AM |
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Samson7256
LIF Infant
Member since 5/06 93 total posts
Name:
John
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Re: 401k to IRA to downpayment?
Posted by riniko
I think it needs to be in the IRA for 5 years, or the IRA needs to have been started 5 years ago.
It is for first time homeowners or people who haven't owned a home in 3 (i think) years.
If you haven't owned a home in the last 2 years then you can be considered a first-time home buyer and withdraw 10k penalty free from your IRA which I don't believe you need to have open for any length of time prior to withdrawal. The 5 year rule applies to withdrawals on Roth IRA's for a 1st time home buyer.
Details from bankrate.com
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| Posted 3/9/07 10:37 AM |
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