Cashing Out 401k To Buy a House – Good or Bad?
Cashing out 401k plans to purchase a home can be done, but is this a smart financial move or is it a very bad idea? Before you make any decisions that could have serious financial consequences you should always seek 401k investment advice from an expert, to make sure that you are doing the right thing concerning your finances and future retirement. Many plans allow a withdrawal without any additionally penalties if the withdrawal is made to purchase a home, pay off specific medical bills, or for certain other reasons which are very limited. Cashing out 401k account balances can help you come up with a down payment, or even the balance of the purchase price in some cases, but is this step really beneficial?
In most cases a 401k hardship withdrawal can be done, but there are fees, expenses, and possibly tax penalties that can apply if you are below a certain age. Not only are you taking away capital from your future retirement but you are also paying a hefty amount to use your own money. Most of the time it may be a better option to start another savings vehicle instead of cashing out 401k plans, because there are no penalties involved or additional expenses incurred. Most safe harbor 401k plans and other types of 401k retirement accounts do allow a withdrawal for the purchase of a first home, but for many the 401k account balance may only cover a down payment.
Some financial experts may advise that cashing out 401k plans for a first time home purchase can be a smart move, if there is enough of a balance to pay a large portion of the home off. This can help you receive a much lower interest rate, and if necessary a shorter term mortgage. The average 401k balance by age shows that many individuals in their 40s or 50s may have a sufficient account balance to cover most if not all of the price of a modest home, with a cost of roughly one hundred thousand dollars. Many financial professionals caution against making a 401k withdrawal for any reason at all though, because these funds will be needed later on.