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Dr. Don Taylor, CFA, advice columnistUsing 401(k) money for a refinance

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.
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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."'s corrections policy -- Posted: April 19, 2006
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