If you're interested in learning more about using your 401k to purchase a house, you've come to the right place. Read on to learn more about the rules that come with withdrawing, if you should use this money, and so much more. There's quite a bit to go over, so let's get started.
Table of Contents
Can I Use My 401k to Buy a House?
How To Use Your 401k To Buy a House
Using a 401k Withdrawal For Home Purchase Rules (2023)
Should You Use Your 401k To Buy a House?
Alternatives To Using Your 401k To Buy A House
Using 401k To Buy A House Bottom Line
Using 401k Withdrawal to Buy a House For FAQs
Can I Use My 401k to Buy a House?
Yes, you can use the money in your 401k to buy a house, but it's not typically recommended as you will incur a 10% withdrawal penalty and be responsible for taxes on any funds you withdraw. One exception exists for first-time homebuyers who can withdraw up to $10,000 without paying the 10% penalty. If you decide to use your 401k to purchase a house you'll also want to consider the impact it will have on your retirement savings.
Oftentimes, the best alternative to using your 401k to buy a house is to get a 401k loan.
How To Use Your 401k To Buy a House
- Obtain a 401k Loan
- Make a 401k Withdrawal
If you want to use a 401k to buy a house, there are two methods you can use to get the money. Let's talk about both of them to equip you to purchase a home. One of them is more beneficial than the other for your financial future.
1. Obtain a 401k Loan
The first thing you can do is obtain a 401k loan. This option is the better of the two. Rather than taking money out of your account, you're taking out a loan on the money in the account. As a result, you don't have to deal with the penalties that come with withdrawing money. However, you will need to redeposit funds to make up for what you borrowed. You'll even need to pay yourself interest.
Repayments are not contributions since you're making up for lost money. You can borrow about half of what's in your account or $50,000, depending on which one is less in your total savings.
2. Make a 401k Withdrawal
The second option, and the worst of the two, is to make a physical withdrawal from your 401k. Although you don't have to pay back the lost money, you have to pay fees and deal with deductions from the amount taken out.
Making a 401k withdrawal to buy a house only makes sense if you'll save significantly on rent or other expenses. That way, you can try to replenish some of your retirement savings in the future.
Using a 401k Withdrawal For Home Purchase Rules (2023)
Several rules come with withdrawing from a 401k before retirement. It's critical to consider these before taking anything out of this savings account. You might regret the decision if you're a certain age.
Here are a few of the 401k withdrawal rules:
- Taking out money before age 59.5 may result in federal income tax
- You may also be responsible for a 10% penalty fee
- First-time home buyers can withdraw $10,000 in 2022 without incurring the withdrawal penalty
- Additional fees may be necessary
Because of these requirements, it can be costly to withdraw from your 401k. If you have to pay the penalty or high taxes, it may not be worth using these funds to buy a home.
Should You Use Your 401k To Buy a House?
If you need extra money to buy a house and can't find it anywhere else, a 401k can be a good solution under certain circumstances. If buying a house will save you a significant amount of money by eliminating rent payments, it's probably a good idea to use your 401k for the purchase, even if you have to pay a penalty.
Also, depending on how much money you need for the purchase, you can obtain a 401k loan. By using a 401k loan, you can avoid the penalties associated with a withdrawal.
Alternatives To Using Your 401k To Buy A House
- IRA
- FHA Loan
- VA Loan
There are several alternatives to using a 401k to buy a house. Let's talk about a few of the best.
1. IRA
You can tap from your IRA instead of your 401k. This account provides an exception for qualified first-time home buyers if you put in some early distribution money in it. It's a better choice than the 401k withdrawal.
2. FHA Loan
You can also get an FHA loan, a government-backed mortgage. It helps you finance and operate, so you don't need to pay as much right up front. Often, you can put down as little as 3.5% if you have a credit score that is at least 580.
3. VA Loan
You can also get a VA loan from the United States Department of Veterans Affairs if you meet the qualifications as a veteran. They have some specific requirements for their help, so you'll need to check them ahead of time.
Using 401k To Buy A House Bottom Line
Although you can use your 401k to buy a house, it's rarely a good idea to withdraw money from your 401k due to the penalties and taxes associated with doing so. If you're a first-time homebuyer you can take out $10,000 to use towards the purchase of a home, but you'll still need to pay state and federal taxes on the funds you withdraw. For most home buyers, the best bet is getting a 401k loan.
Using 401k Withdrawal to Buy a House For FAQs
1. Why shouldn't you use your 401k to buy a house?
You shouldn't use a 401k to buy your house because you'll lose valuable money inside your retirement account that's tricky to make up in the future. You will also deal with fees and penalties if you're younger than 59.5.
2. How much can you take out of your 401k for a house?
There is a specified amount you can take out of your 401k for a house. You can take about half of the amount in your savings out of your account or $50,000. They'll let you remove whichever is less.
3. Can you borrow from 401k for an FHA loan?
If you want to get an FHA loan, you can borrow from your 401k. However, you need to meet standards to qualify.
4. Does 401k affect mortgage approval?
Having a 401k does not impact your mortgage approval. If you have a 401k loan, it also does not affect your mortgage approval. It's safe to take out loans if you're seeking a loan for a home on top of this item.
5. Can I withdraw money from my 401k to buy land?
If you want to take out money from a 401k to buy land, you can go through the same process as taking money out to purchase a home. You will still need to repay this money at the same rate.
6. Does a 401k loan affect your credit?
A 401k loan does not affect your credit rating. You can take loans out of your 401k without any negative impacts, so long as you repay the money you take out of the account on time.