Are you thinking about buying a house in the United States? If so, you will come to the question: “Can I take money out of my 401k to buy a house?” And here you will find the answer.
If you have thought about taking out your 401k K to buy your house, but you have doubts if you can use your 401k for a house. You should know that from the beginning it is possible. But first, you should consider the advantages and disadvantages of withdrawing money from your 401k to make your purchase and whether it is advisable to review other forms of financing to buy your home in the United States,
In this article, we will tell you what you should take into account and why it is (or is not) a good idea to withdraw money from your retirement fund for this objective. Continue reading!
What is a 401k account?
Let’s get this straight: a 401k retirement plan is offered by the United States government to employees through public or private for-profit companies.
This benefit is offered as an incentive to save for retirement; In theory, retired employees must be at least 59 years old to qualify for retirement plan money (or 55 years old if they have lost their job).
But, keep reading! Even if you’re not 59, you can use your 401k to buy a home.
How does the retirement plan work?
The 401k retirement plan is, in a way, a benefit that also comes from the employer’s side. In an agreement made at the time of employment, the employer tells the employee about this benefit and they reach an agreement on the monthly percentage that will go to the retirement fund.
The usual thing is that the employee allocates around 5% of his monthly salary and the employer, in most cases, can add 2% or 3% at his own expense.
In that case, the contribution to the funds would be approximately 7% of the monthly salary.
However, the IRS sets certain annual contribution limits to retirement funds. Currently, the limit represents $20,500 per year. But this limit varies year after year with the country’s economic changes.
So can I use my 401k to buy a house?
The answer is yes, and you may be wondering, “How can I get money out of my 401k to buy a house?”
Get a 401k loan
Spoiler: between both options, this is the most recommended (or, at least, the one that will harm you the least). Unlike withdrawal, when applying for a loan you will not have to assume the 10% penalty for early withdrawal.
However, it is a loan. This means that you must return the money borrowed and this means assuming the cost of the loan along with its interest.
In general, the return conditions will depend on the entity that manages your 401k; but usually, returns must be completed within no more than 5 years.
The advantage of this is that you will be your lender. That is, if you request $10,000 with an interest of 12%, the total amount borrowed will be returned to you with the sum of the interest.
Regarding this, it is important to clarify that loan payments do not count as contributions to the fund. That is, if you borrow money from your 401k retirement fund, you will have to pay a monthly fee (corresponding to the loan) + the percentage of your monthly salary that you have agreed upon with your employer.
But how much money can you borrow from your 401k? Well, at most, a sum equal to half of your savings or $50,000 (whichever is less at the time of applying for the loan). In addition, the purchase of the house must be made within 120 days following the delivery of the money.
Request a 401k withdrawal
And while the idea of a 401k loan is better than making an early withdrawal, not all entities that manage these funds make the loans. If the entity that manages your funds cannot grant a loan greater than $50,000 or cannot offer you any loan at all, then you should think about making a withdrawal that involves paying 10% of the total withdrawn.
The plus point of this option is that the money you withdraw does not have to be returned and you can use it to buy a house or meet your financial responsibilities without accountability.
The conditions corresponding to 401k loans and early withdrawals also depend on the entity that manages the funds; and even the deal you have made with your employer.
Disadvantages of buying a house with money from my 401k
The answer to your question of: “Can I take money out of my 401k to buy a house?” Yes, you can do it, this does not mean that it does not have certain risks.
You must keep in mind that if you apply for a loan, you will possibly put yourself in trouble by having to finance the installments, interest, and monthly contribution that comes directly from your salary.
In the event of a withdrawal, the savings that you have been working on throughout your working life will decrease. For example:
- If you have $20,000 in your account and make a withdrawal of $10,000, in 25 years you will have a savings fund equal to $54,000 (with a return of 7%).
- But if you do not make any withdrawals on your $20,000 fund, in 25 years you could have a fund equal to $108,000, under the same 7% profitability.
Remember that the idea is that the money you accumulate can be used at the time of retirement as an investment fund.
