Should I cash out my 401K to buy a house? This is a question we hear fairly often. Full disclosure, we are not tax consultants nor financial advisors and will always recommend you seek the proper professional’s advise. That being said, if you’re considering tapping into your 401K to buy a home, here are some general fundamentals you should know before doing so.
It is generally considered better to use assets that are less taxed on your funds and that don’t have harsh penalties on you when wanting to put a down payment on a home. It is advised to let a 401K sit and not touch it while it grows until you hit the age of retirement. All the benefits that come along with letting the money in a 401K accumulate can be lost if you go into the funds before you’re supposed to.
That being said, buying a new home, especially as a first time home owner, can be one of the largest investments you can make and one of the biggest decisions of your lifetime. Generally, if your 401K plan allows for it and if you’re under the age of 55, you can take out a loan to avoid any penalties for up to 50% of your balance or $50,000. Taking a loan out against your 401K verses just pulling out a straight withdraw, is a way to borrow against yourself and not against a bank. The interest rates for the loan more commonly are similar to that of a mortgage rate. Having a loan gives you more repayment options and can keep intact much of your long term savings.
If your plan gives the option for hardship distributions, you can get your money, but you will be paying income tax (at your annual tax bracket). With that, you will likely incur a 10% penalty if you are under the age of 55. If this is your first time as a home buyer and you have an IRA, you can take up to $10,000; an IRA can permit this type of dispersal of funds without being left with the 10% penalty that a 401K simply does not offer.
If you’re looking to purchase a home and you have steady income and not as much invested in 401K savings, it is still generally considered best to use cash savings when making your first down payment. Still when buying your new home and taking the leap to making your home owning dreams a reality, it is a great option to speak with your financial advisor to really weigh all possible options that might work best for your individual circumstances. Each person’s situation is different and seeking professional advise is the best thing you can do when considering whether to cash out your 401K to buy a house.
If you would like more information about the real estate market and advise for how to get you ready to purchase a home, Text or Call us at (818) 527-2912 Today!