resjudicata
New member
@mmryan720 it is a 403b it wont be penalized
F It, probably won't make it to retirement. Cashing out retirement to buy a house
- Thread starter blecap1
- Start date
@blecap1 This is a terrible idea, and I think you should evaluate this more from a financial perspective than as an emotional decision.
You will have to pay a 10% penalty on the withdrawal in addition to the standard income tax. Note that this income is on top of the income from your job, so it will effectively be taxed at the marginal rate that you pay currently.
Homeownership comes with a lot of obligations for property tax, maintenance, mortgage, etc. that can easily eclipse the rent you are currently paying. It also makes it hard to relocate for a better job. You could find yourself in a deep financial hole if you don't have liquid assets if you lose your job or have a major emergency. (And you don't, because you'd be using those rather than your retirement fund for the down payment).
If you want to bet on the property market, consider putting your money in a REIT in your retirement account, where you will start with the extra 30% you would have given to the IRS.
Here are some numbers: assuming you make 50k/year as a single person, you pay a 22% marginal tax rate (a small amount at 24% as well). You pay an additional 10% penalty for 32%. Your 60k 403b fund is now $40800.
Additionally penalty-free distributions start at age 59.5 not 65.
Edit: I looked a bit more into the tax situation to make sure I got all my facts right. As some other commenters pointed out, if you are a first time homebuyer, you can withdraw up to $10000 penalty (but not tax) free from an IRA to buy a home. Note that the rule does not apply to 401(k)s, but you can rollover the 401(k) into an IRA first.
You'd get $7800 for that, so in total you should end up with $41800 if you wiped out your 401(k) this way.
You will have to pay a 10% penalty on the withdrawal in addition to the standard income tax. Note that this income is on top of the income from your job, so it will effectively be taxed at the marginal rate that you pay currently.
Homeownership comes with a lot of obligations for property tax, maintenance, mortgage, etc. that can easily eclipse the rent you are currently paying. It also makes it hard to relocate for a better job. You could find yourself in a deep financial hole if you don't have liquid assets if you lose your job or have a major emergency. (And you don't, because you'd be using those rather than your retirement fund for the down payment).
If you want to bet on the property market, consider putting your money in a REIT in your retirement account, where you will start with the extra 30% you would have given to the IRS.
Here are some numbers: assuming you make 50k/year as a single person, you pay a 22% marginal tax rate (a small amount at 24% as well). You pay an additional 10% penalty for 32%. Your 60k 403b fund is now $40800.
Additionally penalty-free distributions start at age 59.5 not 65.
Edit: I looked a bit more into the tax situation to make sure I got all my facts right. As some other commenters pointed out, if you are a first time homebuyer, you can withdraw up to $10000 penalty (but not tax) free from an IRA to buy a home. Note that the rule does not apply to 401(k)s, but you can rollover the 401(k) into an IRA first.
You'd get $7800 for that, so in total you should end up with $41800 if you wiped out your 401(k) this way.
! My finances are nothing to write home about so who am I to say!!avaaddams33
New member
@tseleng Yeah, I'm incredibly sympathetic to OP's burnout (who isn't?) but it is very likely homeownership will just be an even bigger strain. Unless you are very, very, very lucky or live in a super cheap area, 60k will net you a fixer-upper which you definitely do not have the funds to fix. Then you're just trapped in a broken, leaky house and can't leave, with no retirement funds.
Even if its not a fixer upper, depending on where you live you will need somewhat regular maintenance on the roof, the pipes, boilers, leaks, etc which can run you thousands at a time. Let's say a leak gets in the roof in 5 years, and you can't afford to fix it. The leak spreads and ruins the flooring, rotting the walls, raccoons move in, etc, and it gets worse over time because you just can't get enough money to fix it.
Since OP is so burned out they don't care about retirement anymore, I don't think it matters to argue that the money can potentially earn better returns in the future (though it definitely will.) Rather, viewing it from a short-term point of view, its still objectively a bad idea to draw out that money and buy a house. The two scenarios are:
Even if its not a fixer upper, depending on where you live you will need somewhat regular maintenance on the roof, the pipes, boilers, leaks, etc which can run you thousands at a time. Let's say a leak gets in the roof in 5 years, and you can't afford to fix it. The leak spreads and ruins the flooring, rotting the walls, raccoons move in, etc, and it gets worse over time because you just can't get enough money to fix it.
Since OP is so burned out they don't care about retirement anymore, I don't think it matters to argue that the money can potentially earn better returns in the future (though it definitely will.) Rather, viewing it from a short-term point of view, its still objectively a bad idea to draw out that money and buy a house. The two scenarios are:
- No penalties, you get 60k free and clear. Best case scenario, you buy a house that costs about 50-55k after deducting agent fees and other misc. fees., with no money left over for repairs or other maintenance.
- You get hit by penalties and have about 40k leftover. Your house budget is now about 35k, which... isn't a lot.
savednocompromise
New member
@avaaddams33 Why can't they get a USDA loan to buy property and put a manufactured home on it, I'm sure they qualify at least for that with a large downpayment. I assume if they're thinking of using their retirement fund for a house they probably have an ok credit score to be able to qualify for one ..
avaaddams33
New member
@savednocompromise I've seen that mentioned elsewhere in this thread and I think it sounds like a viable plan, although it seems that USDA loans may not be available everywhere so it depends where OP is. I'm not particularly savvy on the requirements for the USDA loan either so I don't know if maybe OP doesn't qualify for some reason?
savednocompromise
New member
@avaaddams33 Should be able to actually check that out on their website if they qualify
savednocompromise
New member
@tseleng Someone said that if you withdraw for a house there's no penalty of 10 percent just regular taxes. Also yes there's plenty of responsibility but it's also peace of mind that the cost of living isn't going to spike for you, you'll pay the same rate as before despite the market price of rent skyrocketing...
4bloodmoons
New member
@blecap1 Can you give yourself 6 months to think about it and talk the whole thing through with someone that you trust? Sacrificing that much in taxes and penalties and future earnings is a big step - and in return you will still have taxes, insurance and maintenance on the property (which you don't have renting). I respect that it is your call - I just don't see the upside in this.
charlotte42
New member
@4bloodmoons 100% agree with this advice. Slow down and make a calculated, informed decision. Run different scenarios to give yourself an idea of a range of likely outcomes. Home ownership can be great for wealth building and at the same time can be very expensive and restrictive.
This is a poverty finance sub so I assume you don’t have a lot of excess $ to throw around. You have to be careful to optimize every dollar. Please be methodical about this. If you need help, post a case study on a personal finance blog or subreddit where you can leverage other’s expertise to run different scenarios.
This is a poverty finance sub so I assume you don’t have a lot of excess $ to throw around. You have to be careful to optimize every dollar. Please be methodical about this. If you need help, post a case study on a personal finance blog or subreddit where you can leverage other’s expertise to run different scenarios.
@blecap1 Just something to consider, that 60k will be worth more when you retire then if you stuck it into a house. So you'll lose money to tax penalties when you pull it out and you'll lose out on the investment opportunity.
You may want to look into a 403b loan, but you have to pay it back which will hurt your DTI when you get the mortgage.
You may want to look into a 403b loan, but you have to pay it back which will hurt your DTI when you get the mortgage.
mymessagetou
New member
championflyer
New member
@mymessagetou Same here bought for $90k 34 years ago, worth $1.3 million now
@championflyer Counterpoint - home value doesn’t mean too much unless you intend on selling and using the proceeds to downsize or move to a LCOL area. In general people aren’t going to willingly make themselves homeless and a like for like trade in the same general area usually doesn’t benefit you at all. While I can see including your home in your NW, IMO the primary value of a home is its ability to shelter you - and for that it doesn’t matter if the house is worth 1m or a dollar.
championflyer
New member
@championflyer While there are ways around the relative illiquidity of a house, all of them are significantly riskier since they are all tied to your shelter as collateral. While I’m certainly not shy about the concept of good debt, a vast majority of people would be uncomfortable taking on that level of risk against that kind of tangible asset.
EDIT:
To add some numbers to this...
90k to 1.5m over 34 years comes out to returns of ~7.7% per year.
That same 90k makes 8-10% per year pre-inflation in the S&P or equivalent index fund.
Not only do you have higher returns but you'll also have significantly higher liquidity and your 7.5% housing return doesn't account for property and maintenance costs over those 34 years.
Not to say that you shouldn't buy a house, but that buying a home is less a purely monetary investment and more a quality of live investment (versus renting as an alternative).
EDIT:
To add some numbers to this...
90k to 1.5m over 34 years comes out to returns of ~7.7% per year.
That same 90k makes 8-10% per year pre-inflation in the S&P or equivalent index fund.
Not only do you have higher returns but you'll also have significantly higher liquidity and your 7.5% housing return doesn't account for property and maintenance costs over those 34 years.
Not to say that you shouldn't buy a house, but that buying a home is less a purely monetary investment and more a quality of live investment (versus renting as an alternative).