Buying a home is a good investment for most people. Right now, the prices of homes are at or near the lowest levels they are likely to reach in the near future. Interest rates are also low right now in an effort to stimulate the economy and get people to make purchases. Some do not have enough cash on hand to put up a down payment on a new home. Many of these people consider using a 401k to buy a home.
It is important to note that any time money is taken out of a 401k retirement fund before reaching retirement age, the IRS imposes stiff penalties along with taxing the money withdrawn as if it were income for that year.
With that in mind, it is possible to take money out of the 401k and use it as a down payment to buy a home. One would be well served to limit the amount withdrawn to only what is absolutely necessary to make a down payment and secure a mortgage. The government will allow this if it is a first home purchase. It will not work to buy a second home.
Under ideal conditions for making this type of withdrawal, one would be looking at two different mortgage options. As an example, we will say that the bank is offering a fifteen year mortgage at a particular interest rate if one can put up a 15000 dollar down payment. Alternatively, the bank may also be offering a 30 year mortgage at a slightly lower interest rate with payments that are easier to manage if one can put 20, 000 dollars down. In this scenario, the best solution using the 401k would be to withdraw only the additional 5000 dollars needed to make up the difference in the down payments. This would result in far less expense due to penalties than using the 401k to fund the entire down payment.
One could use the funds from the 401k to fund the entire down payment if he/she so desired, but doing so would be extremely costly, both right away in penalties and over the long term.
Before making such a decision, one should talk with his/her financial advisor and see if there are any other options available that would not involve withdrawing such a large sum from the retirement account.
A possible better option to consider would be taking out a loan against the equity one has in a 401k retirement account. In the present economic climate, banks might be more willing to make such a loan because the financial outlook can only get better. Using the 401k as collateral instead of withdrawing money from it does not impose the same penalties with the IRS as actually taking the money from the retirement account.
The money one has invested in a 401k is intended to be used to provide an income later in life when one retires. However, the money in the account is the property of the account owner and can be accessed early for several different purposes. Using a 401k to buy a home is one such option, but it is one that should be considered carefully before one reaches that decision.
