So, I'm a first time home buyer who is trying to cover 20% down to avoid PMI on the purchase. I'm wanting to transfer around $5k from my Traditional or Roth 401k to a Roth IRA to use towards the down payment. Can you avoid taxes / penalties and make this transfer? I did some google searches and everything was fairly vague.

6/6/2013 6:54:53 AM

Don't do it - long term you're going to be so much better off if you keep it in there.

6/6/2013 7:08:38 AM

^ Depending on the tax penalty...it might be worth it in this case. PMI is a bitch.

6/6/2013 7:31:34 AM

PMI is looking like $150-$175/month. I think it would be worth it in the long run to avoid that monthly $$ drain. I want to lock in a low rate and eventually convert the property into a rental after (3-5 years) as a primary residence. Has anybody here done this type of transfer before?

6/6/2013 7:35:44 AM

Roth IRAs have a 5 year holding period without penalties / fees. Short answer is no.

Try taking out a loan on your 401k if your provider offers it. Not a withdrawal, a loan, which you pay back monthly. No penalties, fairly low interest rate (4-6%) for a "secured" loan. Make sure the loan from the 401k doesn't exceed the cost of the PMI.

6/6/2013 7:54:57 AM

I was under the impression that contributions could be withdrawn at any time tax/penalty free from a Roth IRA. Transferring $5k from a Roth 401k would be considered an after tax contribution which could be withdrawn tax free then from the Roth IRA. Is this not correct?

6/6/2013 8:20:38 AM

Quote :

"PMI is looking like $150-$175/month."

6/6/2013 8:23:13 AM

My PMI was close to, if not more than that. Thank god that's over and done with.

6/6/2013 8:37:14 AM

Contributions to a ROTH can be deducted at any time tax free. Any growth in the account cannot unless it is an approved disbursement... buying a first home is an eligible disbursement up to $10,000 tax free.

6/6/2013 8:59:02 AM

I def think it's worth it to pay 5K to save $175 a month, however as Perlith stated it's probably best to take a loan mainly b/c the roth ira contribution limit is fairly low.

6/6/2013 3:05:19 PM

Right now I have $5k in after tax contributions in the Roth IRA. My plan is to put in an additional $5k to take advantage of the $10k.

I guess my main concern is just avoiding taxes / penalties in doing the transfer. The funds in the Roth 401k are after tax contributions. There is still no definitive answer as to whether this can be done in a way to avoid paying any taxes or penalties in transferring to a Roth IRA for a home purchase.

To me doing this transfer (if possible) makes sense because PMI is nothing but money down the drain. At the the same time I don't want to be double taxed on money previously contributed to my 401k.

If I used my liquid savings for the 20% it would wipe out the majority. I'd like a decent sized cushion if any unexpected expenses were to arise over the next couple months or years after closing on the home.

[Edited on June 6, 2013 at 3:42 PM. Reason : ]

6/6/2013 3:29:21 PM

If you are taking money from a traditional IRA you will have to pay taxes regardless.

6/6/2013 3:32:13 PM

Our PMI is like 80 a month or something. It will be gone next year, but it wasn't a huge deal for us.

6/6/2013 3:44:40 PM

^ what was the purchase price if you don't mind me asking?

6/6/2013 3:50:29 PM

$195k. We put 10% down.

6/6/2013 3:59:02 PM

^thanks

I've read some horror stories dealing with PMI and having it dropped once you reach 80% LTV. Banks dragging their feet and requiring appraisals and all kinds of BS. There should be better options out there for folks with perfect credit and stable jobs.

6/6/2013 4:01:53 PM

Yeah I am hoping we have no issue. Perfect credit, we borrowed well below where we were approved for, and we pay a little extra each month. I will be quite upset if they make it difficult to get dropped.

6/6/2013 4:04:08 PM

Have you thought about getting a second loan to make up the difference so you don't have PMI on the first loan?

6/6/2013 4:05:02 PM

^ I've thought about it but don't know of any low interest products available.

Thought about doing a cash out refi on my car with penfed. I just bought the thing in '12 and don't have a lot of equity.

[Edited on June 6, 2013 at 4:17 PM. Reason : ]

6/6/2013 4:14:28 PM

Quote :

"Contributions to a ROTH can be deducted at any time tax free. Any growth in the account cannot unless it is an approved disbursement... buying a first home is an eligible disbursement up to $10,000 tax free."

6/6/2013 4:35:12 PM

Just wanted to say that this transfer you are planning on doing is a rollover, not a contribution. Different rules apply to rollover funds. You can avoid the 10% penalty by using the $10k first time home buyer exception, but you might have to still pay taxes on the earnings.

6/6/2013 6:41:06 PM

Decent amount of incorrect info in this thread so here you go.

1) take the roth contribution (not the earnings) out first. Tax free.

2) if your company allows you to take roth 401k money out go ahead but highly unlikely to be the case if you still work there.

3) either take out traditional ira money (penalty free up to $10k for house) or take a loan from your pretax 401k contributions


Personally I wouldn't buy the house bc I think its a poor time to buy. If rates rise you could lose your ass

[Edited on June 6, 2013 at 6:44 PM. Reason : a]

6/6/2013 6:42:31 PM

^ Your saying if rates rise I'll lose my ass on a 30yr fixed rate conventional? I'm looking at holding this property for a long period of time. First as a primary residence and then eventually converting it into a rental/investment property. Where I am looking to purchase the rents are a decent amount higher than what I would pay in a mortgage plus HOA, taxes, & insurance. I think its a solid investment. Rents have been holding steady for awhile now especially in the Triangle market.

6/6/2013 7:25:33 PM

Quote :

"Try taking out a loan on your 401k if your provider offers it. Not a withdrawal, a loan, which you pay back monthly. No penalties, fairly low interest rate (4-6%) for a "secured" loan. Make sure the loan from the 401k doesn't exceed the cost of the PMI."

America: where banks can borrow at nearly 0%, and people can borrow from themselves at 4-6% and it's considered a good deal.

6/6/2013 8:00:44 PM

You realize you're paying that interest to yourself?

6/6/2013 9:08:50 PM

I didn't. Isn't there some kind of fee for taking out a loan from a 401k?

6/6/2013 9:11:30 PM

My belief was that 3-4% is going somewhere other than yourself.

6/6/2013 9:12:47 PM

Yeah, I thought it did as well.

6/6/2013 9:23:43 PM

Quote :

"PMI is looking like $150-$175/month. I think it would be worth it in the long run to avoid that monthly $$ drain."

in the end you'll have more money keeping it in the retirement account

6/6/2013 10:47:00 PM

Can you take out a heloc to pay the extra 10% and avoid the pmi?

6/6/2013 11:37:00 PM

Quote :

"The interest proceeds then become part of the 401(k) balance"

http://en.wikipedia.org/wiki/401(k)

[Edited on June 7, 2013 at 1:10 AM. Reason : ^^^]

6/7/2013 1:09:45 AM

Quote :

"in the end you'll have more money keeping it in the retirement account "

How do you figure?

6/7/2013 8:56:41 AM

Quote :

"Isn't there some kind of fee for taking out a loan from a 401k?"

Not as long as you follow the rules on it, and even assuming you didn't, or had to default on the loan, the worst the penalty can be is to pay taxes on it like you would have if you hadn't even contributed it in the first place.

Not everything is a conspiracy man.

6/7/2013 10:27:55 AM

Quote :

"Not as long as you follow the rules on it, and even assuming you didn't, or had to default on the loan, the worst the penalty can be is to pay taxes on it like you would have if you hadn't even contributed it in the first place."

There's usually a loan application/origination fee and some charge yearly maintenance fees on the loan.

6/7/2013 10:35:55 AM

Quote :

"Personally I wouldn't buy the house bc I think its a poor time to buy. If rates rise you could lose your ass "

I'll ask again as there was no response to the OP--as long as you do fixed-rate rather than an ARM, I'd think the opposite would be true. What's the reasoning here?

6/7/2013 12:50:17 PM

If the rates rise, less people buy houses. Demand lowers, supply stays the same/increases

6/7/2013 2:16:00 PM

That'd still only matter if he planned on selling.

6/7/2013 2:21:39 PM

Quote :

"There's usually a loan application/origination fee and some charge yearly maintenance fees on the loan."

If you have a crappy plan that is.

6/7/2013 2:37:03 PM

I know I'll have some, but it's like $150. Not big at all.

6/7/2013 6:57:17 PM

Kris Thats not true at all. The majority of 401k plans charge a fee to take a loan. Somewhere in the neighborhood of $100-$200 typically.

Also your other statement is completely incorrect. Defaulting on a 401k loan can be extremely punitive. The balance of the loan gets added to your annual income which pushes typical people into a higher tax bracket AND tack on a 10% penalty on top of the normal taxes for defaulting.

For someone who thinks they know so much about finance you really have a very limited understanding. Stick to operations.

Also the interest on the 401k loan is paid back to yourself. However, you will get double taxed on any INTEREST you pay since it comes out of your check after tax and is taxed again when you withdraw the money.


And again I wouldn't buy a house. Rates could possibly explode in the next two to five years and wipe out all of your equity. The entire mortgage industry got laid off this week because applications are approaching 2009 levels. Given that housing prices have rallied I think its a scary time to buy. A lot of new apartments going up should keep rents in check.

6/7/2013 7:05:33 PM

Worrying about rates only applies if you get an ARM. Now is the time to lock in on a low rate if you're getting a fixed rate. In the span of the month, I went from looking at 3.625% to 4.125%, with hopes that I'll lock at 4.0%. If you wait to buy a house, you'll never get rates this low

Disclaimer, we know that rising interest rates will kill the equity of a bunch of rubes that found the ARM so attractive this last round. The self-perpetuating cycle of the housing bubble to crash yet again, plummeting interest rates again.

6/8/2013 12:11:25 AM

That isn't true though. Rising rates will destroy the value of your home


You're buying an extremely leveraged asset at a time when prices have the potential to plummet and you'll lose 100% of your investment and possibly even more....

I just dont like it...

[Edited on June 8, 2013 at 2:21 PM. Reason : a]

6/8/2013 2:01:36 PM