 Using
401(k) money for a refinance
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 Dear
Dr. Don,
Can I borrow money from my 401(k) for my home refinance? Is there
any penalty or any tax issue there for withdrawing money from my
401(k) account? Let me know.
-- Reap Reward
 Dear
Reap,
There's a difference between withdrawing money from your 401(k)
account and borrowing money from your 401(k) account.
If the 401(k) plan provides for plan loans, you can
normally borrow against your account, up to half the vested balance
in the account, or $50,000, whichever is less. General purpose loans
against the plan have to be repaid in five years, but housing-related
loans might qualify for a longer repayment period. Talk someone
in your human resources department for more information.
Withdrawing money from your 401(k) account while you
are still actively employed with the company is normally limited
to very specific reasons spelled out in the 401(k)-plan
documents but generally described as hardship withdrawals. Some
hardship withdrawals are exempt from the 10-percent penalty tax,
others are not. Withdrawing money for a home purchase would be subject
to income taxes and the penalty tax. In all cases, the withdrawal
is taxable income. Employers aren't obligated to offer hardship
withdrawals in the plan. There are some Katrina-related exceptions
if you qualify for them.
I'm having trouble understanding why you need or want to tap your
401(k) plan to refinance your home -- whether it's as a withdrawal
or a loan. There are lots of reasons not to do it. With a loan,
you're repaying the money with after-tax dollars and the loan becomes
immediately due if you no longer work at the company.
Withdrawals are subject to taxation. Assuming you are in the 25-percent
marginal federal income tax bracket and the withdrawal is subject
to the 10-percent penalty tax, it will take a $15,385 distribution
to get $10,000 after tax for the refinancing. While I don't know
your marginal federal income tax bracket, you've got to be up against
it to even consider this step. Plans often require that you stop
contributing to the plan for a period of time after a hardship withdrawal
so you lose out on any potential company matching contributions.
If you're trying to raise the money to pay for closing costs, take
a look at rolling the closing costs into the new mortgage. Of course
you'll want to use Bankrate's refinance
calculator to see if the refinancing makes sense. Good luck.
To ask a question of Dr. Don, go to the "Ask
the Experts" page, and select one of these topics: "financing
a home," "saving & investing" or "money."
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