Question for the Money Doctors
Question submitted on Jul 20, 2012.
QuestionI 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
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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