401k rollover to IRA or new job's 401k?

I have a pre-existing 401k. I can either roll it over to my new job's 401k plan or to an IRA. One specific aspect of this decision is that I want to buy a house and would need some money from the 401k for a down payment. I cannot take a partial withdrawal from either 401k plan. I hate to cash it out totally as, for one thing, it lost 30% of its value in the last 6 months. No news there I guess. I would not be a first time homebuyer. I am familiar with 401k loans but not so much with IRAs. Which would be better? Thanks!

Debmc1958,

Cashing out your 401k is usually not a good idea. But if you are going to use this for a down payment on a house, you need to realize that your tax bill also decreased by that same 30% loss, as did your 10% penalty for early distribution - if you are under age 59.5.

If you are age 55 or older, you can take penalty free distributions from your previous employer's 401k without penalty. A similiar penalty free distribution from an IRA known as a 72t distribution is possible but more restrictive and you must continue taking equal distributions each year for the longer of 5 years or until you are age 59.5.

Typically you must be employed by the 401k plan sponsor to take a loan from the 401k plan. So you could move your old 401k into the new employer's 401k, and take a loan. The maximum loan amount is typically 50% of the 401k balance. Paying the loan back begins immediately. Also if you were to leave your employer, the 401k loan balance would become due usually within 3 months or it is considered a distribution from the 401k. Taxes and penalty would need to be applied as applicable.

The best idea would be to save up at least 20% of the purchase price of house outside of a retirement savings plan.

Thanks for your response. I never looked at it that way, that the tax bill also decreased along with the 10% penalty. I agree about getting the 20% elsewhere and am working on that.

Okay, so one last question - my new employer offers a Roth 401k - does it make sense to roll the old 401k into that? Would I then pay taxes on the rollover now?

Debmc1958,

I doubt you could ROTH the old 401k into the new employer ROTH 401k. Ask the 401k plan administrator, or read the 401k Summary Plan.
And ROTH 401k plans do require RMDs starting at age 70.5.
If you want to have this old 401k account in a ROTH, it would be best to use a ROTH IRA. Doing that, you would need to pay tax on the amount that you put into the ROTH IRA.

IRAs give you more choices for investments. IRAs also are more friendly to non-spouse beneficiaries as compared to 401k plans.

In the big scheme of things, you always want to have some taxable income, even in retirement. We get tax free money when we deduct from our income (even in retirement), personal exemptions, and as a minimum our standard deduction.

That's a good point about wanting to have some taxable income. Thanks

I can't help you with your question because Clyde has already provided you impeccable answers. However, i wanted to concur with him on the fact that you should really look to finance your down payment outside of your retirement funds.

FHA allows for 97% financing and provides great interest rates. If you cannot qualify for an FHA, for any reason save the loan amount restrictions, you probably shouldn't buy a house just yet. I would also recommend that you always have at least 6 months of liquid reserves in savings or money market accounts in the event that you lose your job or otherwise unexpected takes place. This way, you protect the investment in your home and the investments in your retirement fund from early withdrawals, taxes, and bad market timing. A perfect example of this, would be your withdrawal from your 401K to purchase the house. In this case you would be subject to all three of those factors.

Kenneth Besada
Insurance/Financial Services
EMAIL: Kbesada@FarmersAgent.com