When it comes to purchasing a home, first time home buyers frequently have trouble gathering the necessary funds to make a sufficient down payment. If you are a First Time Home Buyer with a 401k retirement plan, it is possible to remove funds for a first home down payment either through an early withdrawal or 401k loan.
Caution: Early withdrawals are only allowed if the account holder does not have other financial resources. For example, if a 401k plan loan causes an account holder to be ineligible for a mortgage, a hardship withdrawal may be a better option.
401k plan loans must be repaid with interest. A typical 401k plan loan must be repaid within 5 years. Loans used for home down payments can be repaid over 10 years instead.
The IRS requires 401k withdrawals to be reported as taxable income. If you withdraw funds from your 401k before you reach the age of 59 ½ years old, you must also pay a 10 percent early withdrawal penalty in addition to income taxes.
401k plan loans may not be greater than $50,000 or 50 percent of the account value, whichever is less. In addition, 401k early withdrawals may not be greater than the amount of the down payment plus any applicable taxes and penalties.
If your 401k does not allow you to withdraw 401k funds without a penalty, consider rolling the money from the 401k into an Individual Retirement Arrangement (IRA). Once in a lifetime, you may withdraw up to $10,000 from an IRA to purchase a primary home for yourself or a family member. IRA withdrawals do not require a 10 percent penalty, but you will need to pay income taxes on the funds. Contact your plan administrator to find out if your 401k is eligible to be rolled over to an IRA.
If you are self-employed, an independent contractor or small business owner with no employees, it is also possible to create a self-employed 401k and roll other qualified retirement accounts into this 401k. Then, you may borrow up to 50% of the 401k plan account balance or $50,000, whichever is less. The funds are tax and penalty free as long as the loan is repaid in equal installments over a five or ten year period.
There are certainly some advantages to borrowing money from your 401k. Primarily, there is no credit check and interest rates are typically low. In addition, first time home buyers can withdraw money from a 401k to make a sizeable down payment if saving up is an issue. Also, don't forget that the interest paid on these types of loans is added back into the overall value of your account, which will help to offset the earings you forego. But remember, borrowing money from a 401k or using funds from a 401k as a down payment will prevent the funds from working in other ways to help fund your retirement. Before deciding to fund a home purchase with a 401k, investigate other private and government programs for first time home buyers.
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