How to Take Money Out of a 401(k) to Buy a Home
Buying a home is a dearly held goal for many. Coming up with the down payment can be one of the toughest challenges. If you have money in a 401(k) plan--and especially if your employer has made matching contributions--you might have a ready source from which to borrow the money you need. Repayments will be deducted automatically from your pay, and you pay the interest on the loan to yourself. If the amount available to borrow from your 401(k) is not enough for the down payment, you might be able to make what is called a hardship withdrawal. You can make a hardship withdrawal for the purchase of a primary residence, whether you are a first-time home buyer or not.
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Instructions
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Take out a loan from your 401(k) by completing a form or phoning the plan administrator. You can borrow up to half of the vested funds, but no more than $50,000. (IRS regulations can be revised, so be sure to confirm the current loan limit.)
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Make a hardship withdrawal if the amount of the loan does not cover what you need to buy a home. Purchasing a principal residence is one of the events for which the IRS will allow a hardship withdrawal. You cannot use this option until you have exhausted your available 401(k) loan money. If you have not reached age 59 1/2, you will have to pay not only taxes but an early-withdrawal penalty; you can adjust the amount of the loan to cover any tax liabilities that arise from making the hardship withdrawal.
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Cease your 401(k) plan contributions for the six months after your hardship withdrawal.
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Tips & Warnings
If you are close to retiring, a 401(k) loan might not be a good idea. Waiting until retirement age will allow you to sidestep negative tax consequences.
Some employers do not allow 401(k) loans or hardship withdrawals. Check with your plan administrator to be sure these options are available.
If you leave your job before repaying the loan and before turning 59 1/2, the balance will be due in full and you will be charged tax and penalty on the money that is due.
