It is my job to help clients purchase their dream home. My goal is to always ensure this home purchase fits my clients’ overall financial goals. I am often asked if 401k funds should be used for the down payment.........
Be sure you think twice before making this impactful decision. There are many considerations that come in to play when you access 401k money before age 59 ½. I suggest you determine the effect on your finances by distinguishing between 401k loans and 401k withdrawals.
“A good rule of thumb is that 401k money should not be touched until you retire.”
A 401k withdrawal can be very costly in that you forgo earnings on the withdrawn funds, plus you face the wrath of Uncle Sam: taxes & penalties on the amount withdrawn. Furthermore, since there are annual limits to the amount you can contribute to a 401k plan, you can’t make up for a previous withdrawal later, even when you are on more I solid financial ground. Avoid withdrawals if at all possible as the negatives are a crusher.
A far better approach is to take a 401k loan, assuming your employer permits this. Any interest you pay on the loan goes back into your account as an offset to the earnings you forgo. The money you receive is not taxable, as long as you pay it back.
The major risk in borrowing against your 401K is that if you lose your job or change employers, you must pay back the loan in full within a short period, often 60 days. If you don’t, it is treated as a withdrawal and subject to taxes and penalties. Loans from a 401k cannot be rolled over.
In the end, you must review your unique situation to make the move that fits your individual circumstances. Contact me any time if you would like help determining what’s best for you...I’m here to help!!