Using 401k To Buy A House – Is It A Good Idea?
Is using 401k to buy a house a good idea? Some say yes, others say no, and for most people the truth lies somewhere in between. If you simply withdraw the funds to purchase the home then you may or may not be hit with a 401k withdrawal penalty, depending on the plan and the circumstances. Most of the time there is a ten percent penalty on any withdrawal made before you reach your retirement age, but there is an exception for buying a first home in most cases. A better way of using 401k to buy a house may be to arrange for a loan from your account, and this method does not include a penalty and allows you to earn the interest paid on the loan as well.
Every buying a house checklist will include a down payment and a larger down payment may mean lower interest rates. If you have a significant amount in your 401k account it may make sense to borrow from yourself, so that you get a better interest rate and the interest payments. Using 401k to buy a house may make sense if you end up paying less for the home, and earn interest that would have otherwise gone to a bank or other lender instead. Normally borrowing from 401k accounts is not advised, but it may be beneficial in certain situations if you want to purchase your first home and have no other way to provide a down payment.
Using 401k to buy a house is not always a bad idea, and many plans will allow you to borrow the balance that you are vested in up to fifty thousand dollars. This amount can go a long way towards purchasing a home. Arranging for a 401k hardship withdrawal to buy a home is not advised though, because the withdrawal will usually be charged a ten percent penalty, as well as causing significant taxes to be owed at the federal and state level.