Can you use 401k for down payment on house

Develop and improve products. List of Partners vendors. The funds in your k retirement plan can be tapped to raise a down payment for a house. You can either withdraw or borrow money from your k. Each of these options has major drawbacks that could outweigh the benefits.

The first and least advantageous way is to simply withdraw the money outright. This comes under the rules for hardship withdrawals , which were recently made a little easier, allowing account holders to withdraw not just their own contributions, but those from their employers. Home-buying expenses for a "principal residence" is one of the permitted reasons for taking a hardship withdrawal from a k. If you withdraw money, however, you owe the full income tax on these funds, as if it were any other type of regular income that year.

This can be particularly unappealing if you are close to a higher tax bracket , as the withdrawal is simply added on top of the regular income. The second way is to borrow from the k. If you leave your job and must repay the loan, the repayment period was increased to the due date of your federal income tax return, instead of the previous to day window, under the Tax Cuts and Jobs Act.

Depending on your plan, you may not be able to contribute to your k until you pay off the loan. Even though you're paying interest, you lose out on potential investment growth of the funds. For starters, although you are charged interest on the loan—the interest rate is typically two points over the prime rate. And it means you are earning at least a little money on the funds you withdraw.

The downside is that you need to repay the loan, and the time frame is normally no more than five years. You must disclose this to the bank when you're applying for a mortgage since it could potentially drive up your monthly expenses. Prior to the Tax Cuts and Jobs Act of , if your employment ended before you repaid the loan, there was typically a today repayment window for the full outstanding balance.

Starting in , the tax overhaul extended the repayment time frame until the due date of your federal income tax return, which also includes filing extensions. Another major downside is that borrowing from your k means you lose out on the potential investment growth of those funds. In addition, some k plans don't allow you to contribute until you have paid off the loan. While your k is an easy source of down payment funds, it's obviously better if you can save the money elsewhere and not take or borrow the cash from your future.

If you do need to resort to using the funds, it's obviously better to borrow them than to take a withdrawal and lose these tax-advantaged savings forever. Internal Revenue Service. PMI typically costs about 0. But PMI also has a great return on investment. Taking a k loan or withdrawal, by comparison, sets you behind financially in a way PMI does not. Look at the long-term, broader view.

PMI is temporary, but the effects of pulling funds from your k could have permanent consequences. For most home buyers, withdrawing or borrowing from k retirement funds to make a down payment on a house is short-sighted.

But your personal finances may create an exception. For some people, a hardship withdrawal or k loan could be a sensible solution. A financial planner can help you weigh your current account balance against your long-term financial goals so you can better decide how to proceed. If you decide to use retirement funds to help buy a home, consider using money saved in a Roth IRA instead of a k or traditional IRA.

Before taking money out of retirement, find out whether you qualify for a mortgage based on your current savings. You might be surprised. Verify your new rate Nov 11th, How Soon Can I Refinance? How Often Can I Refinance? It Is Worth Refinancing For 0. Talk to a Lender: Read this before using your k to buy a house. Gina Pogol The Mortgage Reports contributor.

January 7, - 9 min read. Of course, if you decide to withdraw rather than borrow from your k , the main con is the giant tax hit you will suffer. Looking at your retirement account balance might make you feel as though you have more money than you actually have coming in on a regular basis. Owning a home means regular costs for maintenance, upkeep, insurance, property taxes and much more. As you can see, there are a variety of drawbacks and risks involved in using a k to buy a house.

These include:. As you can see, there are definitely reasons why you might want to avoid this approach to home buying. Call our Home Loans Experts at to begin your mortgage application, or apply online to review your loan options. The good news is that borrowing from your k is just one way to pay for your home. Here are some alternatives that might be less risky. If you do withdraw money, one-third of the total will be included as income in your taxes for each of the next 3 years to spread out the tax implications.

Note that the withdrawal needs to take place by the end of to qualify for this special dispensation, and your employer can choose whether to comply. Be sure to talk to a financial advisor about whether this is a wise strategy for your specific situation.

You also should look into down payment assistance programs. Talk to your mortgage lender about which ones you might qualify for. Typical options include:. These are just a few of the programs you might qualify for. Be sure to talk to your lender about options so that you take advantage of whatever is available to you.

In addition to the aid mentioned above, there are several first-time home buyer loans and programs for which you might qualify. A few examples are:.