401(k) early W/D Penalty

[Bird Legs]

Married couple, husband is retired, wife is 61 and still working. They want to sell their home and buy another. Problem is, the sales price will be about $40,000 less than the
balance of he mortgage. Wife participates in a 401(k) plan at work.
If she withdrew this $40,000. from the 401(k) would it be subject to an early withdrawal
penalty? Maybe borrowing from the 401(k) would be better?
Your comments on this will be appreciated.

[JAinNC]

She is over 59 1/2 - wouldn't it be distributed with a code 2 instead of code 1 on the 1099R?

[Bird Legs]

Additional Info

Can she make a withdrawal if she is still employed and participates in the plan?

[veritas]

If her plan

permits it she can borrow the funds. However It may be better to leave the money in the 401k earning tax deferred and take out a small mortgage.

[DonPriebe]

Take out a mortgage on what?

... However It may be better to leave the money in the 401k earning tax deferred and take out a small mortgage.

They are selling their old house for $40K less than they still owe on it. They need $40K just to walk away from it. Hard to envision that they will have any equity in a new house. Bad situation to be in at any age, must less when you are retired or getting ready to retire.

[S T]

401k

Some thoughts,

Spouse over 59 1/2 so no 10% early withdrawal on 401K, but pay taxes on distribution. What is tax rate and how much will that cost them in tax dollars to draw out the monies needed ( $40K to make up deficiency on sale of house selling for less than owed)

What would it cost the t/p to draw a loan on the 401K money and pay themselves back? Another question would be whether or not the spouse could continue to contribute to the 401K if there is a loan in place.

Another consideration is how long is the spouse going to continue to work. If she draws a loan on the 401K money and then terminates employment , usually the 401K loan is due and payable or a distribution is made in the year of employment termination.

What monies are they going to use for a down payment on the new home?

Sandy

[veritas]

They are selling their old house for $40K less than they still owe on it. They need $40K just to walk away from it. Hard to envision that they will have any equity in a new house. Bad situation to be in at any age, must less when you are retired or getting ready to retire.

Sorry

Misread the post.

[sea-tax]

I will first state that I would first try to explain to the client that taking money out of the 401k should be a last resort. It is basically financial suicide. You have to pay taxes and you loose the retirement asset.
One option I might see if they have thought about if taking money from 401k is the only option is to distribute the money and make a lump some payment on the existing mortgage. This may get the loan balance down enough so that they can refi and get a more manageable payment. This is of course if they would like to keep the house.

Bird in order to help them , I think you need to get to the root problem . Why do you want to sell? Once you fully understand there reasoning I think you can help them solve the problem.
Keep us posted and good luck!

[Bird Legs]

A Big Thanks

to all of you for responding. The home they are selling is a motor home. Total cost about
175000. They are wanting to sell this and buy a home in a retirment community, Sun City,
Georgetown, Tx