Using 401K for downpayment

[Sarah Sparks]

I'm looking to use retirement money for downpayment on a multifamily, but taking it out early I will lose 10K. Looking for unique way to not lose so much or put immediately into something to pay less taxes.

[George Blower]

Originally posted by @Jonathan R McLaughlin:

@Sarah Sparks yes they have expanded the limit to 100k and depending on your employer you can get a 15 year loan for a primary. Very powerful tool and right now a withdraw not a loan even more so: covid related economic injury and you have no penalty on withdrawal and 3 years to pay the taxes....cardule though, like most powerful tools it can pack a hell of a kick if used carelessly :)

Payments on a 401k loan taken under the CARES Act must be paid back starting in 2021 over a 5 year term.

Here are the details regarding the loans:

NEW LOANS:

The CARES Act which was enacted to provide relief to individuals impacted by COVID-19 allows for increased 401k loans and more flexibility for repayment of these loans.

Specifically, you must be an individual who meets one of the following conditions to demonstrate that you have been impacted by the crisis (and it will be your responsibility to retain documents in your files that demonstrates that you are a qualified individual):

• • Individual who is diagnosed with COVID-19, with a CDC-approved test;
  • Individual whose spouse or dependent is diagnosed with COVID-19, with a CDC-approved test; OR
  • Individual who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19; or other factors as determined by the Treasury Secretary.

On or before September 23, 2020, such individuals take a 401k participant loan subject to the following terms:

• Maximum Amount of the Loan: 100% of their 401k balance not to exceed $100,000. Please note that per the multiple loan rules, the amount of the loan must be reduced by the highest outstanding balance of any other 401k participant loan over the prior 12 months (regardless of whether such other loan is currently outstanding).
• Monthly or Quarterly Payments: The loan must be paid back in equal monthly or quarterly payments of principal and interest.
• Interest Rate: The interest rate is equal to prime plus 1% (or CD rate plus 2%) and is a fixed rate that is set at the time that the loan is taken.
• Term of the Loan: Five-year term unless the proceeds of the loan are used to purchase a primary residence in which case the term of the loan may be up to 30 years.
• First Payment:
  • For monthly payments, the first payment that would otherwise be due is delayed until January 2021 (e.g. if the first monthly payment would have been due on May 15, 2020, it will be due on January 15, 2021).
  • For quarterly payments, the first payment that would otherwise be due is delayed until the first quarter of 2021 (e.g. if the first quarterly payment would have been due on May 15, 2020, it will be due on February 15, 2021).

EXISTING LOANS:

The CARES Act which was enacted to provide relief to individuals impacted by COVID-19 allows for increased 401k loans and more flexibility for repayment of these loans.

Specifically, you must be an individual who meets one of the following conditions to demonstrate that you have been impacted by the crisis (and it will be your responsibility to retain documents in your files that demonstrates that you are a qualified individual):

• • Individual who is diagnosed with COVID-19, with a CDC-approved test;
  • Individual whose spouse or dependent is diagnosed with COVID-19, with a CDC-approved test; OR
  • Individual who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19; or other factors as determined by the Treasury Secretary.

If you meet the above conditions:

• You may delay making any 401k loan payments due between 3/27/2020 and 12/31/2020.
• You must commence making loan payments in January 2021 (or the first quarter of 2021 if your loan payments are due on a quarterly basis).
• If you elect to delay making such loan payments, the term of your loan will be appropriately extended. For example, if there are 10 monthly loan payments remaining on your 401k participant loan and the next payment is due April 15, 2020, you can elect to delay making such payments until January 15, 2021 and at that time would need to make 10 more monthly payments through October 15, 2021.