Borrow Mortgages

Can I Use Money From My 401(k) for a Down Payment

Binney Wietlisbach  |  September 4, 2018

Is it ever smart to take money out of your 401(k) and use it toward a down payment for a new house? We weigh in.

I’d like to purchase a new home at the beach that will become my primary residence in about six or seven years when I retire. I’m thinking of taking $200,000 from my 401(k) as a down payment. 

I’m not getting the best returns on it anyway as I’ve been retired from the company and, although diversified, still not seeing any results. I’m still working and contributing to another 401(k) and hope to have $250,000 in this when I retire. But I was always told never to touch my 401(k) money. What are your thoughts?

First, I am glad that you are saving for your retirement and thinking about the appropriate use of your 401(k). Many professionals will tell you (and anyone else) not to take money out of a 401k for several reasons:

  1. The funds you deposited into your 401(k) are pre-tax dollars, meaning you have not paid any taxes on them. In fact, the amount you deposit into your 401(k) each year reduces your adjusted gross income. All growth and income within your 401(k) are not taxed.
  2. Often, as a benefit to you, your employer will match a portion of your 401(k) deposits as an enticement to save for retirement. Typically, there is a “vesting” period during which you need to keep your 401(k) plan in place before these funds become available to you without penalty. If you try to take money out before then, you often forego a significant portion of your employer’s match.
  3. If you are under the age of 59 1/2 years old, you cannot take money out of your 401(k) without a 10 percent penalty plus whatever you do take out of your 401(k) is now added to your adjusted gross income — perhaps throwing you into a higher tax bracket. The IRS imposes this 10 percent penalty as a further deterrent to discourage individuals from taking money out of their 401(k) early. There are narrow exceptions to this penalty, but I doubt they would apply for your reason of a down payment on a new home.

Some 401(k) plans do allow you to borrow from your existing account — you will need to check with the plan administrator to discuss their specific rules regarding borrowing, repayment, etc. However, I don’t recommend this as a viable route for your down payment.

If you are unhappy with the returns from your old employer’s 401(k) plan, you may have several options to improve them. See if you can complete a rollover into your new employer’s 401(k) plan. This would consolidate your accounts and make it easier for you to invest them appropriately. Or, rollover the old 401(k) into a new IRA rollover account you control.

In either case, it is really important for you to review how the dollars in your retirement accounts are invested. It may be wise for you to sit down with an investment professional to discuss, review and map out your financial game plan — for today and the next six to seven years after which time you anticipate retiring. This takes into consideration not only the investable assets within your retirement plans, but also your other assets, debts, cash flow and cash needs.

I do not suggest making this home purchase if the only option is to raid your retirement fund. It would be wise to meet with a financial planner to review and establish an overall financial game plan. You want to make sure you are making good decisions today to help you meet your long-term goals. Good luck!

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