Making a 401k withdrawal to buy a home is one option for coming up with a down payment. Here’s what you need to know about using retirement funds for a down payment.
401k Withdrawal Rules
Withdrawing money from your 401k typically comes with taxes and penalties. However, there are some circumstances under which you can take a 401k withdrawal without paying taxes or penalties. These circumstances include using the money for a qualifying first-time home purchase.
401k Early Withdrawal Rules and Limits
Taking an early withdrawal from your 401k (before age 59 1/2) typically results in taxes and penalties. However, you may be able to avoid these if you meet certain criteria, such as using the money for a qualifying first-time home purchase. You may be able to withdraw up to $10,000 for a qualifying first-time home purchase. However, you will still owe taxes and penalties on any money you withdraw over the limit.
401k Loan Rules
You can also take out a loan from your 401k. The interest you pay on the loan goes back into your 401k account. There are no taxes or penalties associated with taking out a 401k loan. Be sure to run this idea by your mortgage lender first. The 401k loan payment may impact the amount your qualify for on your home mortgage.
Summary
Check with your plan administrator or human resources for guidance and instructions specific to your 401K. Always consult with a CPA or otherwise qualified tax professional and your home mortgage loan officer for advice to determine whether a 401K withdrawal or loan is right for you.
