Penalty-free 401(k) withdrawal exemptionsIf you’re under the age of 59½ and would like to purchase a home using your 401(k) without paying the 10% early withdrawal penalty, you’ll need to qualify for one of these three exemptions:
- First-time home buyer 401(k) withdrawals of up to $10,000 are penalty-free.
- Hardship withdrawals may be available in cases such as high medical expenses or funeral costs. The withdrawn amount is still subject to income tax.
- A 401(k) loan is a borrowing option that allows you to take out a loan from your 401(k) in order to fund the purchase of a primary residence.
How to use a 401(k) to buy a houseWhether you’re interested in applying for a penalty-free hardship withdrawal, first-time home buyer 401(k) withdrawal or 401(k) loan, this retirement savings account can help you afford a new primary residence. Let’s explore how to obtain a 401(k) home loan from your employer.
Obtain a 401(k) loanTo secure a 401(k) loan for a home purchase through your employer, follow these steps.
- Step 1: Check your 401(k) plan to see if it allows you to take out loans and familiarize yourself with the terms and conditions.
- Step 2: Obtain loan application forms from HR or your plan administrator and fill them out accurately, being honest about your financial situation.
- Step 3: Specify the loan amount within permitted limits based on your current balance and down payment plans.
- Step 4: Choose repayment terms and review associated interest rates and fees.
- Step 5: Submit your application and wait for approval, which can take a few weeks.
- Step 6: Consult a financial advisor before proceeding, as this decision affects retirement savings.
Make a 401(k) withdrawalHere is how to make a 401(k) withdrawal:
- Review terms: Once approved, carefully review the loan terms, including the interest rate, repayment schedule and any associated fees. Make sure you understand how the repayment will be deducted from your paycheck.
- Confirm withdrawal amount: The plan administrator will confirm the approved loan amount.
- Receive funds: The administrator will process the loan and transfer the approved loan amount to your specified bank account.
- Begin repayment: Loan repayments will typically begin on the next available pay cycle. These repayments can be deducted directly from your paycheck.
- Stay informed: Regularly monitor your loan balance and repayment schedule to ensure you're on track with your payments. Stay aware of any changes in the loan terms or procedures.
Pros and cons of using a 401(k) to buy a homeBefore you borrow from your 401(k) for house purchases, carefully consider the following advantages and disadvantages. Here are the pros of using a 401(k) to buy a house:
- No credit check for approval
- Liquidate your holdings quickly
- Generally good loan interest rates
- May have to pay the 10% penalty
- Potential loss of 401(k) account growth
- Can’t contribute while taking a loan out against your 401(k)
Alternatives to using your 401(k) to buy a houseIn addition to a 401(k), there are other retirement accounts that can potentially help you purchase the home of your dreams. An IRA, or individual retirement account, comes in multiple forms, and each one can potentially yield penalty-free withdrawals:
- Traditional IRA: If eligible, you can withdraw up to $10,000 penalty-free for a qualified first-time home purchase, subject to income tax.
- Roth IRA: If eligible, you can withdraw up to $10,000 from your Roth IRA tax-free and penalty-free for a qualified first-time home purchase.
- Self-directed IRA: This account allows you to invest in real estate properties, such as a home, using your IRA funds as the investment source.
FAQ: Can I use my 401(k) to buy a house?
Can I use my 401(k) without penalty?
Yes, you can make a 401(k) withdrawal for a home purchase if you meet the hardship or loan exemption requirements of purchasing a primary residence.
How much of my 401(k) can I withdraw to buy a house?
Depending on your company's 401(k) plan, you can withdraw up to $10,000 or 50% of your retirement savings account.
Can I use my 401(k) for a down payment?
Yes, you can use a 401(k) loan for a down payment — however, you may be subject to penalties and may need to find additional funding sources.
Can I withdraw money from my 401(k) to buy a vacation home?
The IRS allows penalty-free withdrawals up to $10,000 for a first-time home purchase, so you may not be able to use your 401(k) to buy a vacation home without paying a penalty.