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I know it's not the best plan. I don't have many choices. Due to a buyer's contract falling through I am not able to carry equity over for a 20% down payment on our new home. In order to complete the close on our new home I am left with a choice of pulling the money from my 401K for a down payment. Fortunately, the market is hot in my area. It should be sold within weeks of our new home.

After our house is sold I will be able to replenish the funds with equity from our old home.

  1. What can I do to minimize tax implications?
  2. If I invest the equity in 60 days of 401K withdrawal can I avoid or minimize tax and early withdrawal penalties?
  3. Should I invest in an IRA or Roth IRA ?

I was told by Wells Fargo, that I cannot return the money to my company 401K.

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    Can you instead take out a loan from the 401k? Some, in particular, will allow money for a house purchase. It may not have a prepayment penalty so you can pay it off when your current house sells. – mkennedy May 4 '18 at 0:45
  • I considered that option. My plan only allows for a 50K loan. I will need more than double that to get to a 20% Down Payment to eliminate PMI. I am afraid to go the loan route if i have to float two mortgages for more than a couple of months the additional loan payment it would hurt me. Pretty sure I cant handle two mortgages and the loan all at the same time. – Bad64goat May 4 '18 at 1:10
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Here are some options:

  1. Negotiate with the seller of your new home to extend the sale (it might cost you a little to gain this extension)
  2. Offer to rent the new home if they're not willing to extend (e.g. if they have a new home they need to close on)
  3. Get a short-term, personal loan from a local bank or credit union
  4. Borrow from the 401(k) to reduce how much you need to borrow from other sources
  5. Find a family member that's willing to help

Any of these is going to cost you about 10% in interest and/or penalties - including the 401(k) loan. Yes, you pay "interest" to yourself, but you lose the gain that the borrowed money would have made.

I would NOT cash out the 401(k) (if you're even allowed to). If you can't close on your old house within 60 days, you'll owe a 10% penalty PLUS your marginal tax rate. And it makes you more desperate to sell, which might reduce how much you get for the house.

If it were me, and I had no other option, I would probably back out of the purchase before cashing in retirement. When the dust settles, I would regret the extra costs I incurred just to close this deal.

For future reference, this is why home purchases are often contingent on the sale of another house. Yes it puts you in a weaker negotiating position, but it avoids situations like this one.

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Assuming there were no after-tax contributions to your 401(k), if you want to minimize tax implications, you should re-deposit the amount distributed into a Traditional IRA within 60 days of the distribution, as a "rollover" (not regular contribution). There will be no tax or penalty from this.

If you roll it over (convert it) to a Roth IRA, you would have to pay taxes on the entire amount converted.

  • So wait, this means you can do an in-service rollover on plans that don't permit one, by withdrawing the money and then placing it into an IRA? (Of course, having to come up with the withheld amount complicates this, but it still might be better than having the money stuck in a plan with bad investment options) – Ben Voigt Jun 4 '18 at 4:42
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    @BenVoigt: Well, usually they don't let you do in-service withdrawals either – user102008 Jun 4 '18 at 5:48

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