Good news, I finally found a buyer for one of my houses! Unfortunately (I guess) they want to pull some money out of their 401k for the down payment. The buyers said that one of their relatives did this a couple of years ago and recommended that they did it too.
Is this legal? And how is it done? I guess I will need to send some info to their employers; so what info will I need to provide to get this done?
Your input is appreciated.
Most 401K loans will allow for an early withdrawal with no penalty if the funds are being used to purchase a primary residence. You should not have to do anything at all. The buyer will most likely need to submit a copy of the purchase contract to the manager of their 401K to verify the purchase.
To clarify; your buyers could take a loan against their 401k (if the plan administrator offers loans) or they can withdraw funds from their 401k for the down payment. If they withdraw the funds even for down payment on principal residence my understanding is they will still owe the 10% penalty plus federal and state taxes on the balance withdrawn. This is not the smartest financial decision as for every $1 they withdraw they will only receive about $0.60.
Withdrawing money from an IRA for purchase of a primary residence can be done penalty free if certain conditions are met but there is a limitation on the amount that can be withdrawn.
http://taxes.about.com/od/retirementtaxes/a/early_penalty.htm