What You Need To Know About Making a Down Payment with Your 401k
Sometimes the decision to buy a home comes at an unexpected time, when the buyer has little or no money for a down payment. When this happens, some buyers turn to their 401k account for the extra funds they need. Taking money out of a 401k for a purpose other than retirement isn't ideal, but for a home buyer in a tough position, the decision may be worthwhile. Here's what home buyers need to know.
Withdrawing From 401K Early Comes At A Cost
A 401k account is a retirement account that is meant to be accessed after years of maturation. However, it is possible for the home buyer to withdraw money from the 401k for a down payment on a home in a hardship situation. Hardship withdraws, however, are subject to income taxes on the money. In addition, the hardship withdrawal may require the home buyer to pay an additional 10 percent penalty on the withdrawal.
These Penalties May Be Avoided
The good news is that additional taxes and penalties may be avoided, if the home buyer is willing to take extra steps. Borrowing the money from the 401k is one way that home buyers can avoid paying penalties. Buyers are allowed to borrow half of their 401k, up to $50,000. The buyer must pay interest on the loan, but the interest payments go back into the 401k, not to the institution that holds the account. Usually, interest on this loan is approximately 2 points over prime.
Home buyers should be cautious when borrowing from their 401k to pay for their down payment. All loans must be repaid to the 401k within 5 years of borrowing. Depending on how much is borrowed, the required repayments back into the 401k plan can be quite high. Home buyers must ensure that they do not borrow so much that their regular paycheck is not lowered to an amount that they are unable to make monthly mortgage payments. Working with a financial advisor or mortgage broker can help the borrower decide whether or not they can afford the monthly mortgage payments after the 401k loan and subsequent repayments.
The other possible option to home buyers is to roll the 401k over into an IRA account. This enables the buyer to avoid paying a 10% penalty for a 401k hardship withdraw. Rolling the 401k over into an IRA can only be done under certain circumstances. For example, the 401k cannot be rolled over if it is a 401k for a current employer. Buyers must find out from their financial advisor when they can roll over the 401k and when they cannot. This process can be time consuming, so home buyers must get started early if they plan to use this as an option.
Contact A Financial Expert
Home buyers who want to use their 401k to make a down payment on a property can make the best choices by talking to a financial advisor. A good financial adviser can help a home buyer to make choices that will enable them to get the most money out of their 401k while also buying a home that meets their needs.
If you're a Roseville TN home buyer who would like to buy a home using a portion of your 401k, or if you want to explore other options for making a down payment on a home, contact a reputable financial advisor. Your financial advisor can help you decide which options make the most sense for your circumstances.