Can You Borrow Money From a 401k to Buy a House?
Money in a 401k retirement account can be borrowed for the purchase of a house. The account holder can use the money in the account for whatever reason, but needs to be wary of the tax implications and penalties.
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Rules
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People can borrow half of the money in their 401k or $50,000, whichever is less, toward the purchase of a home. Borrowers have five years or longer to pay the money back to their retirement accounts, depending on whether they are a first-time home buyer.
Advantages
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Home buyers using a 401k do not face a credit check since they are borrowing their own money. The interest rate is typically less than you will get from a bank, and the interest is tax free. It's typically easy, requiring only a phone call or a filling out a simple form.
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Disadvantages
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The loan will slow the pace of your retirement savings. Payments are added to 401k deductions, so your take-home pay will be less and, if you leave your job early, you could face a tax hit if you don't pay the amount back within 60 days.
Other options
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Save before buying. Instead of borrowing from a retirement account, lessen the amount put into that account each month. Save that money for the down payment. In addition, borrowing money from a relative or friend could be another option.
Expert advice
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Home buyers should seek expert advice when dealing with 401k retirement accounts. Laws and regulations change, and a financial adviser or tax expert should be able to keep track of those ongoing changes and how they affect you.
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References
- Photo Credit Image by Flickr.com, courtesy of woodley wonderworks
