401K to an (ROTH) IRA

[Guest ARPRINCE]

I have a 401K of about $11.5K. I want to transfer this to an IRA so that I can use the $10K to purchase our first house since my 401K can only lend me 50%.

I hope you can help me on the following:

1) Do I transfer this to a ROTH IRA or just an IRA?

2) Can I transfer all of my 401K or just part of it like $10K?

3) How do I transfer this? Fees?

4) Is there a waiting time before I could withdraw this after transferring?

5) Am I missing anything here?

thanks

[MGB]

You may not transfer your 401(k) without a distributable event. That requires termination of employment or termination of the plan. Even upon termination of employment, there is no requirement that the plan distribute before retirement, but most do. Many do not until after the end of the year of termination.

Besides a loan, your plan may also have provisions for a "hardship withdrawal." The purchase of a home qualifies for this under most plans. You would be subject to taxes and a 10% penalty (you would also be subject to taxes taking from the IRA).

The loan is the best approach. By the time you get your hands on the money through any other ways, you have lost considerable amounts to taxes (federal, state, and penalties). For example, assuming you are in the 28% marginal tax bracket and a 6% state tax and a 10% penalty, you are only left with 56%, not much more than the loan (and you still have the other 50% in the plan under the loan). You also lose the tax credit that you would be eligible for in 2002 for contributions to the plan if you take a distribution. There are no tax ramifications of a loan unless you terminate employment while the loan is still outstanding. At that time, if you do not pay it back, it becomes subject to taxes as if you had taken a distribution.

[Guest ARPRINCE]

Doesn't the ROTH IRA have an exception too of waiving the 10% penalty for early withdrawal if I used it to pay the cost of a first time home purchase?

So basically, I'm just looking at 28% tax on my withdrawal.

[John G]

Three suggestions: (1) just wait a while longer before buying a home and save aggressively, (2) look to a short term family loan from a parent or aunt/uncle and (3) talk to local realtors about first time home buying programs which often have extra incentives built in. The 401k/roth option is messy, erodes the value of your tax shelter, and after taxes just does not yield very much for the trouble.