If you’re struggling to save enough for a downpayment, you may be wondering if tapping into your 401(k) is the right option. While it’s possible, doing so comes with significant risks, like early withdrawal penalties and lost investment growth.
In this Redfin article, we’ll answer your questions about using your 401(k) to buy a home through loans or withdrawals and the drawbacks of the process. That way, whether you’re buying a home in Tampa, FL, or in Newark, NJ, you’ll know what options are available if you want to use your 401(k).
Key takeaways
- You can use your 401(k) to buy a home with a 401(k) loan or withdrawal.
- A 401(k) loan allows you to borrow the money without penalty, but you need to repay it.
- A 401(k) withdrawal is subject to a 10% penalty and income tax.
Can I use my 401(k) to buy a house?
The short answer is yes, you can use your 401(k) to buy a house. There are two options to consider – 401(k) loans and 401(k) withdrawals.
401(k) loans to buy a house
The first option is a 401(k) loan for your home purchase. A 401(k) loan allows you to borrow from yourself, so you don’t have to pay penalties or taxes on the funds. However, you’ll need to pay back the loan with interest.
Most 401(k) loan interest rates and repayment plans are pre-determined by your employer or 401(k) provider. It’s common to repay the amount within five years, but some plans allow you to repay over 15 years if the funds are used to buy a home.
You can usually borrow up to half of the money in your 401(k) that you fully own (your “vested balance”), but no more than $50,000.
Depending on your 401(k) plan, you may not be able to make additional contributions until you pay back the loan. Any loan repayments are not considered new contributions either.
401(k) withdrawals to buy a house
Withdrawing from your 401(k) can be riskier, but there are reasons why it may work for you. Some 401(k) providers don’t allow loans, so withdrawing may be the only option…