Can I Use My 401(k) To Buy a House?

Considerations Before Tapping into Your 401(k)

Your 401(k) is money you've set aside for your future, but could you tap into it now? Are there risks associated with accessing your retirement money early?

While pulling money from your retirement could help you achieve current financial goals, such as making a mortgage down payment, there could be serious implications. Take a look below at what it could mean to use your 401(k) to buy a house.

How To Use a 401(k) To Buy a House

It can be tempting to tap into retirement money when you have a large expense, like buying a house. But before dipping into those funds, it's important to know your options and what they mean. A chat with your financial advisor is a very smart first step.

If you want to tap into your retirement, there are a couple of possibilities. First, you could borrow money from your 401(k) and pay it back with interest over time. Or you could withdraw from your 401(k). But there are some implications to consider with each option.

1. Borrowing from Your 401(k)

Borrowing money from your 401(k) may be a possibility, but it also depends on your plan's policies and your age. You typically may borrow up to whatever is less: 50% of your vested balance or $50,000. The repayment term is often five years, but the Internal Revenue Service (IRS) has rules that may shorten or extend your deadline:

• Primary residence exception: You may have more than five years if you borrow money for purchasing a primary residence. Your retirement plan usually sets the repayment deadline.
• Job loss: If you leave your job, your full repayment may be due quickly. Often, this depends on your plan's rules, but some plans require you to repay all 401k loans when you leave your job.
• Plan-specific requirements: Your plan may have other rules not listed here. Check with your plan administrator to learn about additional requirements.

Money you borrow from your 401(k) can go toward your down payment or closing costs. But remember, you need to repay what you borrow plus interest.

2. Withdrawing from Your 401(k)

The other option you have is to withdraw from your 401(k) under what the IRS calls a safe harbor distribution. The IRS notes that you can use a safe harbor distribution for mortgage costs when they're directly related to purchasing a home.

Withdrawals from your 401(k) are usually taxed at your normal tax rate. Plus, if you're younger than 59½ years old, you will likely have a 10% penalty applied. The penalty isn't withheld automatically and is applied when you file your federal income taxes for the year you took the distribution. So, if you needed $10,000 for a down payment, you would need to withdraw enough to cover your taxes and the 10% penalty.

For example, let's say someone in their 30s needs help with a down payment and they want to put $10,000 down. They would need to withdraw $10,000 plus another $1,112 to have $10,000 left over after covering the 10% penalty. Then, the $11,112 would be taxed at their normal income tax rate when they file their taxes.

Considerations for Using a 401(k) To Buy a House

If you're considering using 401(k) funds to help you buy a home, there are some key considerations. Some potential benefits are:

• No credit check
• Good rates
• Quicker access to funds
• No taxes or penalties if borrowed and paid back on time

However, make sure you're aware of the potential drawbacks:

• Taxes and other penalties if you miss a payment to your 401k.
• Lost interest in retirement accounts
• Restrictions on contributions until the loan is paid off
• Loss of retirement savings and extremely high fees and penalties from the IRS if not paid back

While there can be short-term advantages to using retirement funds to speed up your homeownership goals, it's crucial to consider the potential long-term impact. Again, be sure to talk to your retirement plan administrator or a financial advisor for personalized advice based on your financial situation and goals.

Alternatives To Using Your 401(k) To Buy a House

If you want to leave your 401(k) untouched, you may have other options you can use. These include:

• Waiting to buy your home: If possible, consider not buying a home until you've saved enough for a down payment. There are many saving strategies you could use to help. Check to see if one will work for you.
• Researching down-payment assistance programs: There may be programs, including local, state or federal assistance, to help you with a down payment. Also, Fannie Mae or Freddie Mac may be able to help you find grants to make home buying more affordable.
• Considering loans with low down-payment requirements: You may have loan options with low down payments. For example, an FHA loan or a USDA loan may work well for you. Active-duty military members, veterans, and qualifying surviving spouses may qualify for a VA loan with no required down payment. Talk to us to learn more about what's available to you.

At Freedom Mortgage, there are different mortgage options designed to meet different financial needs. These options include some with lower interest rates and no down payment requirement. Explore your options and use our mortgage calculator to estimate your monthly payment.

A Summary of Using 401(k) To Buy a Home

Buying a home can be a very savvy and smart financial decision. Using your 401(k) to help you afford your home comes with many considerations, though. For example, instead of using their 401k savings, some people may qualify for down-payment assistance or a loan that allows for a low down payment. Our mortgage specialists will help you find an affordable plan that works for you. Get prequalified today.