Can You Take 401k Money to Use for a Down Payment?
In the wake of the U.S. mortgage crisis, many mortgage lenders are instituting more stringent requirements for obtaining a mortgage. One of the more common requirements is that prospective home buyers must have a larger cash down payment for the home on hand, sometimes as much as 20 percent of the purchase price or more. For some potential home buyers, coming up with that much cash is a challenge, and they turn to their retirement plans for help.
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Qualifying 401k Withdrawals
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Federal law allows consumers to withdraw funds from their 401k plans before retirement age if they meet certain qualifications. These withdrawals, called hardship withdrawals, can only be made if there is an immediate and pressing need for the money, and if your plan administrator allows them. Qualifying factors include medical or funeral costs, tuition and other education expenses, and to make a down payment on a principal residence. In some cases, you can also make a hardship withdrawal to make repairs on your primary residence or to make payments to avoid eviction or foreclosure on your primary residence.
401k Withdrawal Taxes and Fees
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Any withdrawals you make from your 401k before you reach retirement age are subject to taxes, penalties and fees. As of 2010, the funds you withdraw are subject to income tax and a 10 percent tax on early distributions. These are in addition to any fees that may be charged by your plan administrator.
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401k Withdrawal Restrictions
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In addition to the taxes and fees, the Internal Revenue Service has placed certain restrictions on hardship withdrawals from 401k accounts. In general, you cannot withdraw more than what is necessary to fund the immediate financial need, plus the amount needed to cover any taxes and penalties. You may also borrow money only from the funds that you have contributed to the plan, not from any employer contributions or interest earned.
Contributing to a 401k After Withdrawals
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Once you make a hardship withdrawal from your 401k plan, IRS rules state that you cannot contribute any funds to your account for at least six months after making the withdrawal. Taking the money from your account also permanently reduces the amount of cash in the 401k, as you can't repay the amount to your account in a lump sum.
401k Loans
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Some 401k plans allow account holders to borrow up to 50 percent of the vested balance of their account, up to $50,000. The minimum loan amount is generally $10,000. If you are using the loan to purchase your home, the loan is not taxable. However, the loan must be repaid, and it will be subject to interest. The interest will be added to your 401k account as you repay the loan.
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References
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