Buying a home is an exciting time, but finding the cash for a down payment or the right loan can be complicated. For those sitting on a 401(k), it’s tempting to wonder “Can I use my 401(k) to buy a house?” While the answer is yes, understanding the consequences involved is crucial for financial success.
Learn more about when to use your 401(k) to buy a house and how to find alternative funding options.
The Basics of a 401K
Before asking yourself “Can I use my 401(k) to buy a house?,” it’s best to have a good understanding of what this type of account is. Not every account under this name is the same. Depending on your bank and the account-specific rules attached, you may have a different experience accessing funds from this account.
However, there are some things that all 401(k) accounts have in common.
- Withdrawing before the age of 59½ comes with penalties.
- Withdrawals and contributions are limited by the government.
- There are tax benefits for contributing to your account.
- For withdrawing, you’ll see an impact on your taxes.
All these common factors help to achieve the goal of a 401(k), and that is to prepare for retirement. The government incentivizes having this type of account so that people will be taken care of when they retire. With typically high rates of return, tax breaks for contributions, and employer contribution matches, the government suggests not touching this account before retirement.
Because of this, the means of accessing your account before age 59½ are limited. But they are still possible.
Loans vs. Withdrawals
Once you have reached the minimum age for freely accessing your 401(k), you may choose to use that account for buying a house. Putting your 401(k) towards a house may not be the best idea for your long-term future – you need to have retirement money to live on, after all. But for those with a large amount of savings, buying a house with their 401(k) could be the best way to start retirement.
If you’re younger than 59½, the options for accessing your funds are limited to either withdrawals or loans. There are advantages and disadvantages to each strategy. Let’s take a look at each.
For those looking to take from a 401(k), a loan is typically the best option. That’s because there are very few penalties to the account and your taxes, but remember that it’s only a loan and the amount must be paid back with interest.
Moreover, you may get very much money out and what you repay won’t be considered as a contribution. So while the answer to “Can I use my 401(k) to buy a house?” is yes, even the best option to do it can hurt your financial future.
- No withdrawal penalty.
- No income tax to pay on what you receive.
- You must repay the loan amount to the account with interest.
- The typical repayment period is only 5 years.
- Repayments are not considered contributions, so there is not a tax break available and no employer match.
- Loan amounts are limited to a maximum of $50,000 but can be less depending on your balance.
Not all providers offer loans. In that case, you will need to make a withdrawal.
If the reason for your withdrawal qualifies as an urgent need or hardship, you may not incur penalties. However, if you don’t meet those requirements, you will have to pay a 10% penalty on whatever amount you take. You will also have to pay taxes on this amount as income.
Even if the terms seem agreeable to you, you must consider the impact of diminishing your retirement savings. The potential for growth in a 401(k) is large. Depending on the loans available to you, you may find that you will pay far less in interest over the years than what your money can make in your 401(k).
For example, you could put $50,000 toward a house. But if it stays in your 401(k) for the 25 years it may take to pay for your house, that money could grow at a rate of 7% to over $270,000. This could completely change what life looks like in retirement.
- You can get more than $50,000.
- Money doesn’t need to be repaid.
- 10% penalty rate (although exemptions are available for hardship qualifications).
- Pay income tax on the amount received.
- Diminish your retirement savings.
Alternatives to Using Your 401(k)
“Can I use a 401(k) to buy a house?” is never your only option. Even if you don’t have a large amount of savings apart from your retirement fund, that doesn’t mean you can’t find an alternative for paying for a home.
For those who just don’t have the cash upfront to purchase a home, there are many loan options available. No matter your current circumstances, there is a way to get the financial help needed for purchasing a home.
It is important to do research on loan options, as some loans have friendlier terms than others. For example, you may find that a fixed mortgage loan will have you paying less in the long term than an FHA loan. For some, they may even find out that withdrawing from their 401(k) is the best option after all.
Speak with a professional loan advisor to learn more about comparing terms, interest rates, and outcomes. They will help you determine what will work the best for your current financial circumstances.
Fund Your Dream Home without a 401(k)
“Can I use my 401(k) to buy a house?” Yes. And if you have quite a bit of cash in your 401(k) account, it may seem silly not to put it to good use. However, the consequences of pulling prematurely from this type of account can be severe. You don’t want to go into retirement without enough money for the lifestyle you want.
But even if you find a 401(k) isn’t the best way to fund the purchase of your home, you can still find a way to get the home of your dreams. Contact the Associates Home Loan team, and learn about how to get the money you need for your new home.