If you’re ready to buy a house in New Mexico, but you don’t have the money for a down payment, you may be wondering if you can withdraw from your 401k? Now is a great time to buy a home in Albuquerque, but not everyone has enough saved for closing costs and a down payment. Can you withdrawal from a 401k to buy a house, and is it a bad idea?
The short answer is yes. Generally, you can withdraw money from your 401k or take a loan your 401k. Whether or not it is the best option for you depends on your circumstances. Keep reading to learn more about how to withdraw from a 401k to buy a house.
Should you withdraw from a 401k to buy a house?
There are two things to consider. A 401k plan is intended to be used for long-term savings for retirement. If you withdraw money from a 401k before you are 59 ½ you will have to pay a 10% early withdrawal penalty. In addition to that, any time you withdraw money from a 401k, you have to pay income tax on it. Depending on how much you take out, you could be paying a significant amount of money in penalties. On top of that, it takes away from your retirement savings.
Interest rates on mortgages are currently at record lows, which makes it really tempting to tap into your 401k. Some things you should consider before you withdraw or take a loan from your 401k. How long did it take you to save the money you plan to withdraw? How long will it take for you to grow that investment back (plus the penalties)? Most financial experts do not recommend withdrawing money from a 401k early, even to buy a house.
Still, it’s your money. If you are ready to buy a house and want to withdraw from your 401k you can. There are two ways to do it, a 401k withdrawal or a loan from your 401k. Which option you choose depends on your circumstances and your 401k. Not all employer plans allow you to withdraw or take loans from your 401k.
401k Withdrawals
If your employer allows hardship withdrawals, you can withdraw money from your 401k to come up with the cash needed for a down payment or closing costs. The IRS allows hardship withdrawals for immediate financial needs like foreclosure or medical debts. They do not allow hardship withdrawals for consumer purchases (like buying a car). But, a down payment for a primary residence can be considered a hardship withdrawal.
Make sure you understand how much you will be paying in taxes and penalties before you make any withdrawal. For example, according to Fidelty.com, if you make a withdrawal of $15k, you would need to take out $23,810 to cover the taxes and penalties. This is why in most cases taking a withdrawal from your 401k is not the best way to come up with a down payment for a home.
401k Loans
Not all employers allow you to borrow from your 401k. If you are able to take a loan on your 401k, it may be a better option than taking a withdrawal. Taking a loan from your 401k allows you to avoid the high cost in penalties and taxes that happen when you make a withdrawal. Keep in mind, employers are not required to offer loan options with their 401k plans. You must apply for a loan and fulfill all the requirements.
You can borrow up to 50% of your vested account balance or $50,000, whichever is less. The loan must be paid back within 5 years in most cases. However, homebuyers may be exempt from the 5-year requirement if they are using the loan to purchase a primary residence.
Alternatives to using your 401k to buy a house
Before you tap into your 401k, talk to a real estate professional about your options. A real estate agent can provide you with resources on lenders and programs you might qualify for.
FHA loans
FHA loans require small down payments, as little as 3.5 % down. Additionally, you can qualify for an FHA loan with a much lower credit score than a traditional mortgage. If you are interested in buying a home now and do not have a large down payment to work with, this may be a good alternative for you.
VA loans
VA loans are available to veterans. With a VA loan, you can purchase a home with no down payment. VA loans do not require a minimum credit score, but they are managed by private lenders so the lender may have their own requirements.
Withdraw from an IRA
An IRA withdrawal is a much better alternative than using a 401k. If you have an IRA, you can withdraw up to $10,000 without paying a penalty if you are a qualified first-time home buyer.
