Is it possible to cash out your 401K retirement money early when you quit a job to buy a house?

Question

I need to speak to a CPA about this, but I was just curious on what everyone thinks. I know I will be penalized for taking money out early and I do know that if I were hypothetically was going to take a loan out, it can't be used to buy a house. However, what if I was to quit? Am I allowed to touch that money for a house?

Any thoughts would be helpful. Thank you!

Answer 1

You may cash out your 401(k) at anytime.  Taxes and penalties will apply.  Assume that at least 40% of the balance will be for penalties and taxes (10% penalty, 30% taxes)...so you are not surprised.  And, of course, the plan itself has a process for cashing out that can take up to 90 days (30 days is typical).

The money then can be used for any purpose.  Outside the 401(k) the money simply becomes your income after taxes again.  However, if you are also taking a mortgage to buy the property the mortgage company may or may not have a problem with down payments coming from a 401(k).  In theory, they would not care as long as you can prove you have cash available by the closing date.

Loans are a little trickier.  In theory, loans against 401(k) are suppose to be for "hardship" only.  In practice, plans allow loans for all kind of unstated purposes:  it's all up to the plan (your employer & the plan administer).  They can be very strict -- require lot's of paperwork and "proof" -- or they can be very lenient -- only requiring you to fill out the paperwork, never checking anything except your identity.

Answer 2

You will be taxed and pay a penalty.  Then do whatever you want with the money

Answer 3

I did it and I regret it.  I now have nothing and have had the worst luck.  With many unexpected expenses in life and now a property that has depreciated about 25%, we are wishing we had stayed where we were or purchased within our working day funds.  We purchased our "dream" -- a custom built home on a golf course 2 & 1/2 years ago.  Our "dream" has turned into a nightmare.  We have had it listed with a realtor since October 2007, but are now looking into a short sale or forclosure.  Don't spend what you don't have in the bank and be careful not to overspend.  ***Just because you qualify for a loan does not mean you can afford it.***  Sure wish someone had given us that advice a few years ago.

Answer 4

Well if you cash out, you can do whatever you want with it. It is my understanding (I may very well be wrong though) that it just can't be rolled over to a mortgage, or loan of any type.

But yes you can cash it out, you'll take a big loss though.

My advice, don't cash it all out, just borrow from it.

Answer 5

Suze Orman says never do this. http://www.suzeorman.com/index.cfm

Answer 6

You can always cash out a 401K as long as you pay the 10% penalty and claim it as income.  You don't have to have a reason.  However it is NEVER a good idea to cash out a 401K for any reason prior to 59 1/2 years of age.  You will NEVER make that money up in your retirement and you will regret it greatly later in life.  Either do with out or wait until you save the money for the downpayment but do not cash in your retirement.