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Question for the Money Doctors

Question submitted on Jul 20, 2012.

Question

I lost my job 2 years ago and my actual house is almost back to the bank. I have a 401 k plan can I use the money in the plan to buy another house that is cheaper and affordable for me? in tax terms how it affects

Answer

I do not recommend using your retirement assets to buy a house for the following reasons:

1) 401k money is protected from creditors. 

2) Cashing your 401k early could cause you to lose up to 40% in taxes and penalties.  For example, if you need $10,000 for a down payment, you would have to take out $16,667 to cover the $6,667 in taxes

3) You are giving up the opportunity for future growth.  After 30 years, that same $16,667 could become over $112,000 if you earn 5% average annual rate of return.

Why not rent for while until your get back on your feet?  While renting, set a goal to save for a down payment on a new home.  Housing is recovering but home prices will probably remain cheap side for the foreseeable future.  There is no harm in being patient.  Good luck.     


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