Loan vs. Withdrawal from 401K and Gifting money

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Her lender will probably ask questions about large deposits within a few months of the loan application. I know when I bought mine I had a large deposit from some side business that got questioned. They were making assumptions that someone gave me money for a down payment.

why run you retrement.you also pay tax your daugter will also pay a gift tax

http://www.ehow.com/info_8750582_...er-65.html

Thanks. Repped you both

I too got the 20 questions regarding large deposits.

Despite what many incorrectly think the fact of the matter is you are NOT double taxed when you take a loan.

Take $10K out of your 401K. This money was pretax.

You can take that $10K that you just borrowed and put it right back into your account (granted there are origination fees for the loan). It would be no different if you took the loan spent it and paid it back with other monies.


Regarding Gifts: $13K is current the max you are able to give to each individual annually, however if you are married the $13K can come from each person and therefore the max is $26K if you and your wife wanted to give to your daughter. There is also a lifetime gift exemption of $5M currently...although this will likely decrease in the future.

Quote from PiratesSayARRR : Despite what many incorrectly think the fact of the matter is you are NOT double taxed when you take a loan. Take $10K out of your 401K. This money was pretax. You can take that $10K that you just borrowed and put it right back into your account (granted there are origination fees for the loan). It would be no different if you took the loan spent it and paid it back with other monies. Regarding Gifts: $13K is current the max you are able to give to each individual, however if you are married the $13K can come from each person and therefore the max is $26K if you and your wife wanted to give to your daughter. There is also a lifetime gift exemption of $5M currently...although this will likely decrease in the future.

Thanks. That's the best example I've seen to explain the tax.

If you do gift the money to your daughter, just create a gift letter that your daughter can give to the loan officer with all of her other paperwork.

http://www.fivecentnickel.com/200...ft-letter/

Quote from gammann : If you do gift the money to your daughter, just create a gift letter that your daughter can give to the loan officer with all of her other paperwork. http://www.fivecentnickel.com/200...ft-letter/

Thanks. Someone suggested I make her a joint account holder on one of my accounts. Not sure yet how that works.

Just keep in mind that even on a joint account, if your daughter takes out more that the gift limit, it may be subject to the gift tax.

Also if for some reason she needs to file bankruptcy or is sued, that account would be considered part of her assets.

Quote from vicra : Thanks. Someone suggested I make her a joint account holder on one of my accounts. Not sure yet how that works.

Yeah, you could do that. It would certainly depend on the amount you're dealing with, but a couple we know last year did this. They opened an account with both their names and the names of one of the sets of parents. They used the account to gift the money and avoid the IRS treatment. They were also very close with their loan officer who did not question the money. Depending on how soon your daughter is going to actually buy the house, you may want to take this approach ASAP as the loan officer will likely go back 2-3 months of banks statements. If she purchases late this fall and simply lists this joint account and behaves like it's always been available to her, it should circumvent some of the concerns from the loan officer.

As for the source of the funds, it would depend on your age, (you mentioned you're over the retirement age), your current income - and whether that includes Social Security - and your current tax rate. Definitely don't want to pry on that, but those would greatly factor into what might make the most sense. And if you did elect to choose a loan, would this be a 2nd mortgage, etc?
Off the top of my head, if you are not using the maximum interest deduction on any existing mortgage AND a 2nd mortgage wouldn't leverage you too much if you anticipate needing additional credit (such as a car, etc), it may make the most sense. You would be able to deduct the mortgage interest under your name and allow your 401k to continue to [hopefully] grow. Even if your 401k returns 4% annually, the 2nd mortgage may share that repayment rate. But you'll incur the tax hit now on the withdrawal which may push you into a higher tax bracket and/or force some of your social security (if applicable) to be taxed. This is inverse to a 2nd mortgage which would be a deduction (thus less than an actual out of pocket 4% repayment - dependent upon your current tax rate), and the amount you would withdraw would potentially miss out on anticipated growth. Now if you're to take an actual loan against the 401k and not a withdrawal, it's a whole different story : ) Then, depending on any loan fees, it's anticipated market return vs the repayment rate (again, the rate less than tax deduction). Heck, even if there are origination fees, they'd compare against the closing of a 2nd mortgage. At least it's apples to apples though.

Quote from cavan : why run you retrement.you also pay tax your daugter will also pay a gift tax http://www.ehow.com/info_8750582_...er-65.html

His daughter would not pay gift tax; he would pay the gift tax. It's so that people can't gift out all their money/assets to avoid estate taxes. They'll get you one way or another.

Quote from vicra : Thanks. Someone suggested I make her a joint account holder on one of my accounts. Not sure yet how that works.

That could seriously change her Debt to Asset ratio and make things worse. It would also bring in your account for close examination. Investigate this more before you make the decision. Also make sure that everyone is in a financial place where buying a home is the right decision. There is a lot more expenses that goes in to a home than just the mortgage payment. (Taxes, insurance, utilities, maintenance, and much more)

Quote from LiquidRetro : That could seriously change her Debt to Asset ratio and make things worse. It would also bring in your account for close examination. Investigate this more before you make the decision. Also make sure that everyone is in a financial place where buying a home is the right decision. There is a lot more expenses that goes in to a home than just the mortgage payment. (Taxes, insurance, utilities, maintenance, and much more)

Thanks I will look into this.

I was under the impression they only look at 2-3 months of her financial statements.

Wouldn't it make her have higher assets so improve the debt to asset ratio?