Dear John: A friend of mine took money out of his 401(k) to put a down payment on an apartment.
His mortgage payments are less than his rent was, he’s building equity, and even though it will take him some time to rebuild his retirement fund, he’s got an investment he can enjoy in the here and now.
So: A good idea? S.L.
Dear S.L.: It depends on how he took the money out.
He could have taken a loan out against the 401(k) retirement plan, in which case the money would have to be repaid to himself.
Or he could have simply made a withdrawal from the plan. This is called a hardship withdrawal, and it is subject to a hefty tax.
In the opinion of David Wasserstrum, a partner at the accounting firm of WeiserMazars LLP, “Loans are always better than hardship withdrawals.”
Wasserstrum explains that hardship withdrawals are permitted for a half-dozen reasons, one of which is the purchase of someone’s principal residence. But the withdrawal would be counted as a person’s ordinary income for the year withdrawn, plus a 10 percent penalty.
You wouldn’t have to pay a penalty if there were a medical hardship, but you would still have to pay income tax on the money. And there are limits to the amount that can be withdrawn for medical care.
People who are over 59 1/2 years old are allowed to make withdrawals from 401(k) plans for anything they want — including home purchases — without a penalty. But they’d still have to pay the ordinary income tax. And making a withdrawal like this while you are still working could very well bump you up into a higher tax bracket.
Loans can be taken against 401(k)s for any reason. But the rules are that you must pay the money back at a certain interest rate. And the loan typically has to be repaid over five years, although that may vary.
A bank, however, might be reluctant to give you a mortgage if it knows you are borrowing money from your 401(k) for your down payment.
This is really complicated stuff, and 401(k)s under the current restrictions aren’t going to be very helpful in getting people into homes. That is why I’ve suggested that the rules be changed — and the taxes lightened — so that 401(k) and other retirement plans could be used as a tool to get the US economy going again.
Send your questions to Dear John, The NY Post, 1211 Ave. of the Americas, NY, NY 10036, or john.crudele@nypost.com.