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Question for the Money Doctors

Question submitted on Apr 20, 2014.

Question

Can I use my 401K to buy a house, if I am first time home buyer?

Answer

You're probably not going to be able to use your 401(k) to help with the purchase of your home. When a company maintains a 401(k) plan, they have to make sure that it complies with a host of pretty complicated rules. Some of these rules are designed to make sure that participants use their 401(k) accounts for their intended purpose, namely retirement planning. Among these rules are restrictions on when a company can allow an employee to receive any of their 401(k) balance and continue working for the company. Of course, if you change jobs, you'd be entitled to receive your 401(k) balance, or you could have it transferred to a new 401(k) or IRA account. But as long as you're working for the company, you won't be able to receive a distribution until you reach age 59 1/2. There are limited exceptions to this rule for hardship distributions, but the purchase of a first home will not qualify for this relief. The rules for an IRA are more liberal than a 401(k) in this respect and you might be able to use an IRA for a home purchase (although you would still have to pay income tax on whatever you withdrew from your IRA and possibly a 10% penalty tax as well if the distribution is over $10,000).

One possibility that might offer you some help in using your 401(k) to purchase your first home might be to take a loan from your 401(k) account if your plan allows loans. You won't be able to borrow more than 1/2 of the amount in your account and even that is subject to a $50,000 overall limit. Also, you might want to chack with your mortgage lender to see how they would view this. Some lenders won't view this negatively since the borrowing is basically secured by your account balance, but other lenders may not feel that you have sufficient equity in the property to support your overall borrowing. Generally, borrowing from your 401(k) plan is to be avoided since the loan has to be repaid over a period of no more than 5 years normally through payroll deductions. Many people who borrow from their plan find that the loan repayments make it impossibile for them to continue to contribute to the retirement savings and they wind up losing valuable years of retirement savings while the loan is being repaid. If that's your only source of funds, you may be forced into taking this loan, although it might make better sense to delay buying the home until you can do it without borrowing against your retirement.


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