If you lack cash for an advance and you have a retirement plan at work, you may be wondering if you can use 401 (k) to buy a home. The short answer is yes, you can use the funds from plan 401 (k) to buy a home. Can I take out my 401k to buy a house?
Quick review of 401 (k) rules
401 (k) accounts are intended for saving for retirement – which is why account holders receive tax breaks. In exchange for deducting the money brought into the plan and allowing it to grow without tax, the government severely restricts account holders’ access to funds.
You should only withdraw money after turning 59 – or be 55 if you have left or lost your job. If this is not the case and you buy the money, you will be charged 10% of the amount of the earlier withdrawal. To add insult to injury, account holders are also guilty of regular income tax on the amount (as with any distribution from an account, regardless of their age). Still, it’s your money and you have the right to do so. If you want to use your funds to buy a home, you have two options: borrow from your 401 (k) or withdraw money from 401 (k).
Withdrawal from 401 (k)
The first and least favorable way is simply to withdraw money. This is in line with the rules on difficult payments, which have recently been somewhat facilitated, allowing account holders to withdraw not only their own contributions, but also employers’ contributions. Expenses for the purchase of a house for the “main residence” are one of the permitted reasons for the difficult payment of 401 (k).
You get money needed for an advance.
- You are required to pay income tax on your payment.
- Withdrawal can take you to a higher tax bracket.
- If you are under 59, you also owe a 10% penalty for any money paid.
- You can never pay your account and lose years of tax-free earnings.
However, if you withdraw money, you will be required to pay full income tax on these funds as if it were another type of regular income this year. This can be particularly unpleasant if you are close to a higher tax bracket because the payment is added to your usual income. There is a 10% penalty, also known as early withdrawal, in addition if you are under 59½ years old.
401 (k) Loan option
The following rule is strict. You can take a loan from the smaller of these two options: 50% of your accumulated 401 (k) balance or a maximum of $ 50,000.
Other important factors to consider will be different for each employer:
- Loan period (usually five years).
- Required repayment within 60 days if the employee quits or is dismissed (or this will be seen as withdrawal and a 10% penalty plus income tax rate will apply).
- What is the repayment rate? (Note: the rate pays itself, not the bank or employer).