House Underwater...Looking To Buy Another?

Question

So I am 64 and getting ready to retire at 66 or 67.  We are really interested in Florida.  A condo or townhome.

But here's the issue.  Our current home is underwater. Sure I made a mistake of buying at the peak.  Paid $240K in 2005.   It's now worth maybe $190K. If the market does not pick up considerably in the next 2-3 years, I am considering walking.  I am in Arizona where the law says the mortgage company cannot come after me.  I have an 80/20.  Both me and my wife's current credit score is near 800. We have no bills except the 2 mortgages and normal household bills.

I don't have a lot of available cash to put down.  I do have a 401K that despite the "never touch it" recommendations  I have been reading, it's my money and I should have access to it.   I would like to access $50K for a down payment.  I know I would be liable for federal and state taxes.  I'm good with that. I can pay the taxes now or later, what's the difference (besides a lower bracket later).  Right now after deductions, I am in the 15% bracket.

So does anyone know how I can access my own money?  As I understand it, you have to retire from the company or be in some hardship situation.  I am in neither.  Like I said,  I'd like to purchase the Florida property now or within the next year while I am still working.  When I retire, I will have roughly $50K of income/yr from a pension and SS.

Ideas?

Cal C. · Answer

@Ray Jender with little other debt and depending on your income you may qualify to have a second home.  I know navy federal was doing vacation home loans a couple of years ago and are likely still.  Obviously I'm assuming your location implies you are military and thus qualified to use navy federal.

Also,  you may have a large tax hit if you do a strategic default.  The mortgage company may charge you for the cost of the foreclosure.  Check with an atty and/or CPA. If so, you may be paying a lot more than the taxes on the difference between amount owed and sales price.  Short sale with a release may be a better option.

Dmitriy Fomichenko · Answer

@Spenser  Harding

the self-employment does not have to be a consulting, real estate would work as well.  And yes, you are correct, if you have 401k with current employer - it is stuck there until you leave the company.

Spenser Harding · Answer

@Dmitriy Fomichenko + @Walt Payne
I did some research on this over the weekend and I face two barriers: 1 being I don't think I can transfer out of my current 401k for a rollover and 2 being I am a SEC licensed individual and since I work for a broker/dealer, they have to sign off on any side jobs I do for conflict of interest.  I am able to invest in real estate but consulting might raise some brows. I will report back with my findings.

Dmitriy Fomichenko · Answer

Walt brings a great point: Solo 401k is a great vehicle which give you great control and flexibility to invest in a tax-free or tax-deferred environment.

Derek Smith · Answer

Everything stated so far has been great info! Here are some other items you may want to consider:

1. I'm not sure how this applies to retirement, however, most 401(k) include a clause once employment is terminated the loan is typically due in full within 60 days.

2. The money being paid back to your 401(k) is taxed. Then when you go to take the money out at retirement its taxed AGAIN.

2a. Furthermore, the monies being paid back typically will NOT be reinvested until the full amount is paid back, which means losing out on market gains during repayment.

3. You may only borrow $50,000 or 50% of what you invested, which ever is the lesser amount.

4. Make sure to understand all fees involved. Although not a typical loan there will be fees and may even see annual fees.

5. Defaulting on a 401(k) loan is asking for impending doom! So be careful of this one!

If you're able to do the solo 401(k) as mentioned above, that may be your safest bet. Otherwise you may want to look into P2P lending (Propser, Peer Lend, etc.) if your credit is that high you may be able to obtain a great rate without touching your 401(k).

Good Luck!

Walt Payne · Answer

@Spenser  Harding Do you do any consulting, or have any self employment income? If so you might be able to set up a solo 401k, then transfer the money by a legal sleight of hand. If your bosses agree, you could retire long enough to transfer the money to your solo 401k, then return to work. I know of a few who did this. I would suggest talking with any of the more knowledgeable members when it comes to 401k laws. But if you could arrange that, you then have control of the money. Mostly the same rules, but the $50k would not be due on retirement, nor taxed as a distribution. BTW thar would also work if your wife were self employed or consulting.

@Dmitriy Fomichenko

Ray Jender · Answer

Thanks again Spenser.  I will definately have to call my  HR on Monday to find out my options.

Spenser Harding · Answer

Hey Ray,

Typically they would want you to send in a purchase/sale agreement on the property you want to buy.  I am not a real estate agent nor do I have my license but if I recall correctly, on there it states how the property is intended to be used i.e. primary, vacation, secondary, investment home. ***I would like confirmation from a BP member about this. But it is up to your 401k plan specifically if they need to see the purchase and sale or not.  But yes, that is what I was saying about taking a loan term for longer than you plan on working for two reason: 1) lower payments and 2) access to your own money.  Once you retire, I think you will have two choices either paying off the loan in full to your 401k or taking the distribution at which time the taxes will be due.  You should take into account for how the payments will affect your paycheck and treat it as an expense. I wouldn't sell your property in AZ as it is a potential rental hot bed and you can have a renter pay off the rest of your balance eventually.

Ray Jender · Answer

Thanks for the response Spenser.

Yes, the 50K is in my current employer 401K plan.  There is more in there, but I'm only looking for 50K.   How can I take the loan for a primary house when I already have a primary house?  Are you saying that if I take a loan for longer than I plan on working, the loan will convert to a distribution and taxes will then be due?

Thanks,

Ray

Spenser Harding · Answer

Hey Ray,

I have a family member in the same situation.  Is the 50k in a 401k of your current employer? If so, you can take a loan out for up to 20 years for use of a purchase on you "primary house".  If it is a general purpose loan, you can take a loan term of up to 5 years.  It sounds like you will be retiring by the maturing of the loan so when this happens, the loan will convert to a taxable distribution from your 401k and since you are over 59.5, you will not pay the 10% uncle same fee.  Call your HR department and talk to them about the rules for your plan.  I have not purchased any property yet but I am considering doing the same thing.  For the last 7 years I have plugged as much money in my 401k as possible but I just don't realistically have control over the funds and would like to diversify and buy some investment properties with that capital.