I ruined my family financially by withdrawing money from my 401(k) to buy a house – I’m sorry

I recently made the panicked decision to withdraw all of my money from a retirement account and I am currently paying for a house in February (about $200,000). I am 36 years old, married and have one child first-year old. Half of me is regretting and I worry about next year’s taxes due to the withdrawal and the 10% penalty I paid.

I saved money with my family to buy our first home. Lately, however, interest rates have gone up, making me worried that the door to getting an affordable home is closing. In a panic, I withdrew all of my $26,000 in savings from my 401(k) and deposited it in a high-yield savings account (3.75%). We have now selected a home and will be using about $18,000 of this money to pay upfront.

Now I am worried that I may have to pay income tax and penalty for the withdrawal. I am extremely worried about this situation as I feel I have destroyed our family’s financial future and we cannot afford to pay taxes on the money I have withdrawn.

My main concern or question is, is there a way to tell the IRS that this money is being used to buy a home? At that time?

See: I’m a single dad maxing out my retirement account and making $100,000 – how do I get the most out of my retirement?

Dear reader,

The first thing you need to do: Take a breath. Most decisions should not be made in a panic, especially when it comes to money.

Because you’ve already withdrawn your 401(k), yes, you’ll have to pay taxes and penalties. If it is a loan, you will have to pay interest on what you borrowed, but that will be your own account. However, remember that loan amount from your employer-based retirement plans are also at risk – if you leave your job for any reason, it is your responsibility to repay the money or it will be considered a lump sum. distribution.

I understand your sense of urgency in wanting to buy a home in time favorable marketBut your time now should be spent preparing yourself financially and saving for the future.

Jordan Benold, a certified financial planner at Benold Financial Planning, said: “I wouldn’t advise this or do it this way, but he’s not stuck and it’s not detrimental – it’s It’s just a hard lesson to learn.”

Be very serious about your current finances and find ways to set aside a portion of your income for savings if possible. There are a few things you should do.

First, assess how much taxes and penalties you will have to pay. I’m not sure what your tax bracket is, but does this allocation push you into a higher tax bracket? You can use a calculator or talk to an accountant to see if the withdrawal will be taxable – then make sure you can pay it or talk to the Internal Revenue Service about a extension. There are penalties for not filing or paying taxes, and you don’t want to add that to your stress.

Also see: We have 25 years until retirement and are saving 25% of our income – are we doing it right? And are we saving too much?

There’s nothing the IRS can do for you to waive those penalties — although there’s no harm in asking, even if you have to wait a while on the phone to talk to someone — but communicate and Attention to detail is key when it comes to your taxes. Calling an IRS agent and talking about your situation won’t be a waste of time. There are many rules and an agent can help understand your options.

Read: The days of IRS forgiving RMD mistakes may soon be over

When you’re done, take a look extremely careful with whatever money you have in and what will come out. You are about to close a home and it costs money – not only the house itself but all the additional costs associated with closing. You may also need money for insurance, furniture, any repairs, etc. Also, list any expenses you expect to have over the next 12 months – home insurance and taxes, etc. mortgage or utilities, groceries, medications, any other non-negotiable expenses and add it all up. Don’t forget anything – ask your partner if there is anything you may have forgotten.

Then compare it to your earnings. Are you below? Do you want to finish? What changes can you make without completely draining your happiness? I always support one balance…yes, in some cases, you may have to temporarily forgo some spending when building an emergency savings account or paying down debt, but don’t completely deprive yourself of the fun, or all the effort Yours may backfire. If you absolutely need to buckle up, make a separate list of activities and recreation that you can get for free (or as close to free as possible)—walking in the park or on the beach with your partner and kids, museums on your free days, fortune and movie nights at home with family and friends, etc.

Want more helpful tips for your retirement savings journey? Read MarketWatch’s “Retirement Tips” column

Set aside a portion of your income to supplement retirement savings before you try to save for any other goals. (However, this account is different from an emergency savings account – you Candlestick You can do that with payroll deductions in your 401(k), or also by allocating some of your savings to an IRA outside of your 401(k).

Take the time to learn the rules of your retirement plan. For example, an IRA allows an investor to take $10,000 out of the account with no penalty for a first-time home purchase (while a 401(k) doesn’t have that exception). It may be too late for that, but there are other perks with various retirement accounts.

A 401(k) has a higher contribution limit and also comes with employer matching (if your company offers it), while an IRA allows free withdrawals for college. With a Traditional IRA, you pay taxes on withdrawals, while with a Roth IRA, you already pay taxes and won’t have to pay any more on withdrawals from your contributions (you may have to pay taxes on your withdrawals). on the earnings section, so please follow distribution rules rigid).

Remember – you don’t want to distribute your retirement savings over anything. You can borrow money to buy a house or go to college, but you can’t borrow money for retirement, so it’s important to protect those accounts. Familiarize yourself with the pros and cons of all accounts so you can maximize your savings and diversify your withdrawal options when you finally retire.

So just fasten your seat belt, rearrange yourself and think about the future. “He had plenty of time — 30 to 40 years to work,” said Benold. “This could be a distant memory he hopes he can forget.”

Have a question about your own retirement savings? Email us at [email protected]

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