Thinking about using your 401k for a home purchase? Buying a home can be a
financial stretch. With soaring home values and rising interest rates, many
potential first time home buyers find saving for adown payment increasingly difficult.
For many people, the main source of savings is in the form of a 401k and tapping
into this resource for a home purchase is one way to find the down payment
necessary to finance a new home; but should you use your 401k to buy a home?
Experts are conflicted.
A 401k is a retirement savings plan offered by employers which takes
pre-tax earnings and deposits it into an investment account for use in
retirement. The money in a 401k account can be accessed by either taking
out a loan against the balance or by a straight withdrawal. A withdrawal
before the age of 59.5 is also subject to a 10% penalty.
Taking out a loan from a 401k account may be a viable option for potential
home buyers. For one thing, a loan from your 401k should not count
against your borrowing power. You also don’t need to qualify because you
are borrowing from yourself. The amount you can borrow is limited, for
example 50% of the balance, and typically must be repaid within 5 years.
The other option is a simple withdrawal; the 10% penalty is incurred, but
the value is not usually limited.
Saving for a down payment can be challenging. So, if you’re thinking about using
your 401k for a home purchase it may be a great option. Speak with your financial advisor
and see if this is the right financial move for you.
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