Use 401k To Buy House

If you are having difficulty with your down payment, you should use 401k to buy a house instead of your savings. Many people are unaware this is an option. However, you are able to take money from your 401k to put a deposit on a house. This guide will take you through your options and the potential risks involved.

Use 401k to buy house

Understanding the rules of your account is important if you want to use 401k to buy a house. The money in there is earmarked for retirement. Strict limits are placed on access to the money in exchange for the tax benefits. This can present challenges when using the money for a down payment. Ordinarily, you are not supposed to withdraw money until you are 59 ½ years old (or 55 if you are not employed). Taking money out before this time usually results in a withdrawal fee. You also should have to pay taxes on the money, always consult your CPA before doing so. However, it’s your money and you are entitled to use it if you need to.

 

Withdrawing from 401k to buy a house

When you take money from your 401k, you are technically taking a hardship payment. This is a payment taken when you have ‘immediate and heavy financial needs.’ The plan administrator decides whether you qualify or not. The payment covers things like medical expenses, preventing foreclosure, and the purchase of a principal residence. So, technically, you are able to use 401k to buy a house. 

It’s your money, so you don’t need to repay it if you don’t want to. However, taking a large sum and not repaying it will disrupt your retirement plan. When you take a hardship payment, you will have to pay an early withdrawal fee. There are some situations where you are exempt, but when buying a home, it’s likely you will have to pay. If you are going to use this option, make a plan for repaying the money so you can meet your retirement goals.

Use 401k to buy a house with a loan

Hardship payments are not the only option if you want to use 401k to buy a house. Consider taking out a loan against your 401k instead. This is the preferred option for many people when they are using their 401k for home purchase. You do not need to pay an early withdrawal fee or pay income tax on the money when you take out a loan. On the other hand, you do need to pay the money back.

The account holder will decide how long you have to pay the money back. Usually, when buying a principal property with your 401k, you get longer to pay it back. You will also have to pay interest on the money.

Use 401k To Buy House

Is it a good idea to use 401k to buy a house?

It’s important to consider the potential risks if you want to use 401k to buy a house. Although it can be a good way to raise money for a down payment, you risk damaging your retirement plan. For a first time home buyer 401k withdrawals and loans are less risky. You are likely to be far from retirement so you have time to build the funds up again. However, if you are closer to retirement age, it can be a risk.

Taking out a 401k loan is the safer option in most cases. You don’t have to pay the early withdrawal fee and it is tax free. Additionally, you are tied into paying the money back, so your retirement fund is more secure. Having said that, it’s best to look into alternatives before relying on your 401k. You can use other retirement accounts, like your IRA. The withdrawal is tax-free if you use it to put a down payment on a home. There are also down payment assistance programsavailable, so you may be able to get the money without using your retirement accounts. In some cases, it’s better to wait another year or two so you can save the money. Overall, using your 401k to buy a property can be a good option. However, there are risks involved and you need to consider them before making any decisions. Look for other ways to raise the money for a down payment first. But if you cannot find the money elsewhere and you are in a rush to purchase a home, then you should consider using your 401k for a down payment.

Sources

https://www.investopedia.com/articles/personal-finance/051614/when-401k-hardship-withdrawal-makes-sense.asp

https://www.irs.gov/taxtopics/tc558

https://www.creditkarma.com/personal-loans/i/loan-from-401k