Should you use 401k funds to purchase a home?
We answer your questions in this video!
Thanks for listening and reading the Mortgage Brothers Show. Let us know if you have any questions you’d like us to answer on this podcast. You can email your questions to Tom@AZMortgageBrothers.com or Eddie@AZMortgageBrothers.com.
Be sure to ask us for a free quote on your next mortgage. We’ll personally work with you and help you through the whole process.
Signature Home Loans LLC does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Signature Home Loans NMLS 1007154, NMLS #210917 and 1618695. Equal housing lender….(read more)
LEARN MORE ABOUT: 401k Plans
REVEALED: Best Investment During Inflation
HOW TO INVEST IN GOLD: Gold IRA Investing
HOW TO INVEST IN SILVER: Silver IRA Investing
Should You Use 401k Funds to Purchase a Home?
Purchasing a home is often considered as one of the most important financial decisions in a person’s life. It requires careful planning and saving to afford the down payment, which can be quite substantial. For some individuals, the idea of tapping into their retirement savings, particularly their 401k funds, might seem like an attractive option. However, before deciding to use these funds for a home purchase, it is essential to weigh the pros and cons.
To begin with, it’s important to understand what a 401k account is. A 401k is a retirement savings plan offered by many employers, allowing employees to contribute a portion of their salary before taxes are taken out. These contributions can be invested in stocks, bonds, or mutual funds, allowing the money to grow tax-free until retirement. Withdrawing funds from a 401k prematurely can have significant implications.
One of the main advantages of a 401k is the ability to accumulate a substantial amount of money for retirement. Over time, the funds have the potential to grow considerably, providing individuals with financial security during their golden years. Using these funds for a home purchase, however, can significantly deplete one’s retirement savings, potentially leaving them unprepared for their future needs.
An important factor to consider when contemplating using 401k funds for a home is the potential tax implications. A 401k is a tax-advantaged retirement account, meaning contributions are made on a pre-tax basis. If funds are withdrawn before the age of 59 ½, in most cases, they are subject to a 10% early withdrawal penalty on top of regular income taxes. This can be a substantial financial hit for someone trying to purchase a home, making it an unfavorable option.
There is also the opportunity cost to consider. By withdrawing money from a 401k, individuals miss out on the compounding effect of the funds. Over time, the growth potential of these investments can be substantial, and by removing the funds prematurely, their ability to compound is significantly diminished. This can result in a considerable loss of wealth in the long run.
Furthermore, withdrawing 401k funds for a home purchase may lead to additional mortgage insurance costs. Most mortgage lenders require a down payment of at least 20% to avoid private mortgage insurance (PMI). If the funds from the 401k are used to make the down payment, individuals may fall short of this threshold, resulting in the added expense of PMI.
However, in certain circumstances, using 401k funds for a home purchase may be a viable option. For instance, the 401k may allow for a loan provision, where individuals can borrow against their account balance and repay it over time. This can provide a solution for those who can afford the repayment while still maintaining their retirement savings intact.
Ultimately, the decision to use 401k funds to purchase a home should be carefully considered, taking into account one’s financial situation, long-term goals, and the potential consequences. It is advisable to consult with a financial advisor or planner to assess whether this is the best course of action based on individual circumstances.
In conclusion, while it may be tempting to dip into one’s 401k funds to purchase a home, it is crucial to thoroughly evaluate the pros and cons. The long-term consequences, taxes, loss of growth potential, and potential additional costs should all be considered before making a decision. By carefully weighing the options and seeking professional guidance, individuals can make informed choices that align with their financial goals and aspirations.
If you borrow from your 401K, the amount you borrow is no longer compounding correct? If this is correct, doesn't that defeat the purpose of allowing the money to compound?
Hi, I’m currently buying a house march 2023. My 401k has taken a 7% loss from a year ago. My portfolio is not diverse. I COULD borrow up to $23,000 for a principle residence loan on my 401K. I am tempted to take the loan for the closing costs only, $9500. Would this be a safe investment, while diversifying my investments? I am not financially savvy and paying the remaining $6500 out of pocket would exhaust a majority of my cash supply. Is taking the loan from my 401k the best option?
I’m at 11-44 still no idea id they answer the question, get to the point already
What if i want to build a house abroad?
You should not have stated that the 401k fund will appreciate by 10% a year, that simply is not the case.
Great info. You help me decide on what to do, which is go forward with the 401k loan. Thanks
if you quit job do they own your house ?
Thanks for the info!
Can you do this without a tax penalty in 2022?
I got the 401k loan disbursed to my account and the house construction still has 4 months to go. I haven't closed on the home yet. Can I pay it back and get it again in 3 months?
Thanks! Very informative analysis. I'd love to see a continuation of this series where you discuss the cost and process of repaying a 401k loan?.
What happens if you buy the home and don’t take out a loan but pay cash for the house from your 401k
I'm trying to buy a piece of property that has an older manufactured home that can't be financed but the property is being sold for less than the going rate in the area. So want to get a loan for the property and bonus there is a livable mfg. Really having a hard time finding financing for this and wondering if it can be done this way. Or what type of loan I cam get for property. Very confused 1st time buyer with a potential good deal.
great point about the 10 year periods. we have fewer than we think.
I heard you can still withdraw from your 401k without the penalty and up to 100k and i was wondering the manufactured house i want is 100k plus land like 2 acres for 35k and install fees and i have 24k in savings and like 89k in my 401k. took me like 9 years to build at 34. do you think it would be a good ideal to take it all out and try to pay most the house off and only owe for the land and install install fees and whatever is left over in the house. figued my bill would go from 1300 to like 600. Or do you think it would be best just to withdraw the 20% for the house and keep the rest in the 401k.
umm, property taxes?
So you two are making another major assumption that the potential homeowner would never in those ten years make another contribution to their 401k. If you wanted to be accurate about it calculate your return from the market as if you were contributing 4% of your income yearly. That doesn’t even include any potential employer match and most plans match up to 4% at least giving you 8%. I make less than 50k and have been contributing regularly to my 401k for 10 years and my net worth is more than both examples combined and one owns a house much nicer than I can afford. Obviously I see the value of what you are saying but I think the approach to this equation is focusing on the wrong piece of the puzzle. The 401k contributor should contribute regularly the entire time. Start at the point in the 401k that you could potentially make a 12k withdrawal (24k) then have one example take the withdrawal and the other doesn’t. Both contribute their lifetime. Then show us the next 30-50 years in the same spreadsheet format presented here. If the contribution amount matched what a homeowner would have to make to afford that home then that would be a real world equation.
Great discussion… thanks for making an excellent compare & contrast.
Thank you! I learned a lot ! 🙂
With the CARES act and no penalties of withdrawal, since I took a paycut, I'm definitely considering this as I am a first time home buyer
Omg! I love the informational content! I am a first time home-buyer closing in less than thirty days. I learned so much and you guys broke it down and made it easy to understand. New subbie I am!