If you're currently on the hunt for a home but are not sure if you'll be able to afford the down payment, you might ask yourself the question "Can I use my 401k to buy a house?" The answer is yes, you can, but you need to consider that you will be penalized for doing so since your 401k is meant to be used for income once you reach retirement age. You will need to ask the manager of your plan for your specific distribution requirements.
Avoiding the Early Distribution Penalty
In addition to the likely 10 percent early distribution penalty if you take the money out before retirement age, you will also face a 20 percent federal tax when you take that money out because it is put into the account tax deferred. Because of this, you should use caution before resorting to using your investment in this manner.
A lot of people get think that you can take money out of your 401k to purchase a home without paying a penalty because you can do so with an IRA - but only if you're buying your first home and plan to live in it, not use it as an investment property. If you'd like to take advantage of this rule using the money from your 401k, you will need to roll the money from the plan into an IRA first. Make sure to do a direct rollover or you will still be charged the 20 percent federal tax. Note that, even in this circumstance, you cannot use more than $10,000 of your investment to use in the purchase of your home. This can be helpful for a down payment. If you need more money than this, you will have to explore other avenues.
Can I Use My 401k to Buy a House?
If you would like to use your 401k to buy a house, one course of action is to talk to your plan administrator about how to go about withdrawing the funds. In most cases, you can simply request a check for your desired amount. Keep in mind that the penalties will be taken out of your remaining balance or will be charged ahead of time if you plan on withdrawing the entire thing. Be aware that once you tap your 401k, you will lose out on some important retirement savings. You may want to explore the following options before resorting to using your 401k to buy a house:
- Getting a gift contribution from a relative
- Taking out money that is already in a traditional or Roth IRA
- Seeing if you can roll more of the costs into your mortgage loan
- Using money that is in a bond, certificate of deposit, or savings account
Can I use my 401k to buy a house? You may be able to take out a secured loan against the money in your 401k to help you buy your home or renovate your home too. This can be an option for people who have a substantial amount of money in a 401k, yet do not want to obtain a mortgage for the full amount of the purchase. It's best to speak with your tax advisor about how to go about doing this to best benefit your personal financial situation. Note that if you default on this loan, you could face penalties. Your tax advisor is your best source for information regarding the consequences of investment withdrawals.