Should I cash out my 401k to buy a house?
If you’re considering tapping into your 401K to buy a home, here are the fundamentals you should know before doing so.
It is best to use assets that are less taxed on your funds and that don’t have harsh penalties on you when wanting to put a down payment on a home. It is advised to let a 401K sit and not touch it while it grows until you hit the age of retirement. All the benefits that come along with letting the money in a 401K accumulate are lost if you go into the funds before you’re supposed to.
Buying a new home especially as a first time home owner can be one of the best investments you can make and one of the most imperative decisions in your lifetime. But with that said, you want to be cautious when it comes to your long term plan as a financial investor. If you make a decision on the whim for the sake of buying your new home, it could ultimately be harmful to your retirement plan.
If your 401K Plan allows for it and if you’re under the age of 55, you can take out a loan to avoid any penalties for up to 50% of your balance or $50,000. Taking a loan out against your 401K verses just pulling out a straight withdraw, is a great way to borrow against yourself and not against a bank. The interest rates for the loan more commonly are similar to that of a mortgage rate. Having a loan gives more repayment options and it’s much less of a sacrifice to your long term savings.
If your plan gives the option for hardship distributions, you can get your money, but you will be paying income tax (at your annual tax bracket). With that, you will have a 10% penalty if you are under the age of 55. If this is your first time as a home buyer and you already have an IRA, it would be a better route to take up to $10,000. An IRA does permit this type of dispersal of funds without being left with the 10% penalty that a 401k simply does not offer.
If you’re looking to purchase a home and you have steady income and not as much invested in 401K savings, it’s best to use cash savings when making your first down payment. Financing a home with a loan works for some but if you’re monthly mortgage payment are already high, then adding a loan with interest to those payments can be challenging. When buying your new home and taking the leap to making your home owning dreams a reality, it is a great option to speak with a financial adviser to really weigh out all possible options that might work best for your individual circumstances.