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Can I Use My 401k To Purchase A Home

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How To Use A 401 Loan To Buy A House

Can I Use My 401k To Buy A House

A 401 loan is the preferredmethod if you need to cash out some of your 401 retirementfunds tobuy a house. Thats because theres a much lower cost associated with a 401loan comparedto a 401 withdrawal.

You should also know:

  • A 401 loan is usually not counted in your debt-to-income ratio, so it wont hurt your chances of mortgage qualifying
  • 401 loans are not reported to credit bureaus, so applying for one wont harm your credit score

Can I use my 401k to buy a house without penalty?

Unlike a 401 withdrawal, a401 loan is not subject to a 10% early withdrawal penalty from the IRS. Andthe money you receive will not be taxed as income.

The rules for using a 401 loanto buy a house are as follows:

  • Your employer must allow 401loans as part of its retirement plan
  • The maximum loan amount is 50% ofyour 401svested balance or $50,000, whichever is less
  • The loan must be paid back withinterest , on a schedule agreed to by youand your 401 provider
  • Typically,you cannot make 401 contributions while you have an outstanding 401 loan

401 loans typically need to bepaid back over five years.

However, when the money is used topurchase a home, youre usually allowed to pay it back over a longer period oftime. Rules vary by 401 company, so check with yours to learn more.

Drawbacks to 401 loans for home buying

While youre paying back the 401 loan, you usually cant make new contributions to your retirement account. And that means your employer wont be matching contributions, either.

Considering Life After Retirement

Lastly, you need to consider the loss of retirement income, since that’s what a 401k is supposed to be. During the recession, a lot of people saw their accounts shrink down to nothing. Many of these people later kicked themselves for not withdrawing the money. This adds another variable into the mix — the safety and security factor. You can see why it’s not a question I can answer for you. There are just too many “it depends” scenarios to think about. But hopefully, after reading this article, you’ll know exactly what to research and consider.

Here’s some recommended reading I want to leave you with. There’s an article on called “10 Ways to Come Up With a Down Payment.” It’s worth reading. It provides a short overview of different strategies you can use, along with the pros and cons of each.

This article deals with the question: Can I use my 401k to buy a house in 2010? If you have additional questions about the home buying process, mortgage loans, or related topics, you can do a search at the top of this page.

Leaving Work With An Unpaid Loan

Suppose you take a plan loan and then lose your job. You will have to repay the loan in full. If you don’t, the full unpaid loan balance will be considered a taxable distribution, and you could also face a 10% federal tax penalty on the unpaid balance if you are under age 59½. While this scenario is an accurate description of tax law, it doesn’t always reflect reality.

At retirement or separation from employment, many people often choose to take part of their 401 money as a taxable distribution, especially if they are cash-strapped. Having an unpaid loan balance has similar tax consequences to making this choice. Most plans do not require plan distributions at retirement or separation from service.

People who want to avoid negative tax consequences can tap other sources to repay their 401 loans before taking a distribution. If they do so, the full plan balance can qualify for a tax-advantaged transfer or rollover. If an unpaid loan balance is included in the participant’s taxable income and the loan is subsequently repaid, the 10% penalty does not apply.

The more serious problem is to take 401 loans while working without having the intent or ability to repay them on schedule. In this case, the unpaid loan balance is treated similarly to a hardship withdrawal, with negative tax consequences and perhaps also an unfavorable impact on plan participation rights.

Read Also: How To Rollover Fidelity 401k To Vanguard

Borrow Against Your 401

Borrowing from your 401 is generally the more advantageous option if you want to tap your plan for a down payment.

If your employers plan allows employees to take out loans against their 401 accounts, youll typically be able to borrow up to 50% of your vested account balance or $50,000, whichever is less.


Youll then have to make more or less equal payments at least quarterly, with interest until youve repaid the loan. Youll typically need to repay it within five years.


  • Wont affect your credit


Learn More: 401 Loans: Should You Borrow Against Your Retirement?

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Can I Use My 401K For Real Estate Investing?

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Read Also: Can I Borrow From My Solo 401k

How Much Can You Withdraw From 401k For Home

In most cases, you can borrow the lesser of up to 50% of your vested balance or $50,000. This means that if you have $200,000 vested in your 401k, you can only borrow up to $50,000. If you have $60,000 vested, you can borrow up to $30,000.

Your vested balance is the amount of money you’d be able to keep if you left your current employer. Any money you’ve personally contributed is automatically vested. The money your employer contributes is usually only vested once you’ve stayed with the company for a certain amount of time.

Withdrawing From A 401

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 401.

  • You owe income tax on the withdrawal.

  • The withdrawal could move you to a higher tax bracket.

  • If you are younger than 59½, you also owe a 10% penalty on the money you withdraw.

  • You can never repay your account and lose years of tax-free earnings on the money you withdraw.

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. There is a 10% penalty tax, also known as an early withdrawal penalty, on top of that if you are under 59½ years of age.

401 plans do not have a first-time homebuyer exception for early withdrawals, but IRAs do.

Don’t Miss: Can I Invest In 401k And Roth Ira

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Using A 401 Withdrawal To Buy A House

Can I Use My 401k To Buy a Home in 2020

401 withdrawals are generallynot recommended as a means to buy a house because theyresubject to steep fees and penalties that dont apply to 401 loans.

If you take a 401 withdrawalbefore age 59½, youll have to pay:

  • A 10% early withdrawal penaltyon the funds removed
  • Incometax on the amount withdrawn

For example, say you withdraw$20,000 from your 401 to cover your down payment and closing costs.

  • Youll be charged a $2,000 earlywithdrawal penalty
  • Andyoull have to pay income tax on the $20K, which likely comes out to around$4,000-$6,000

Thats up to $8,000gone from your retirement savings, on top of the initial withdrawal.

The standard rules for 401withdrawals are as follows:

  • Most 401 plans allow withdrawals only in cases of financial hardship
  • However, using the money to buy a primary residence often qualifies as a hardship withdrawal
  • You can withdraw only the money required to cover your immediate need
  • The money does not have to be repaid

Since the IRS considers 401 withdrawals income,withdrawing 401 money could bump some home buyers into a higher tax bracket.This could add even more to the cost of the early withdrawal.

Coronavirus update:

The CARES Act provision allowingfor tax-free withdrawals from a 401 expired on Dec. 31, 2020. The IRSsnormal 10% penalty is being enforced on hardship withdrawals in 2021.

Read Also: How To Transfer 401k From Fidelity To Vanguard

Borrowing From Your 401

If you would like to borrow from your 401 to fund a home purchase, then you must do it through a “401 loan.” A 401 loan is a loan that lets you borrow a certain amount of money from your 401 at a set interest rate. As with a standard loan, the money that you borrow will have to be repaid within a certain period of time.

Not all 401 plans allow for loans, so the first thing you should do if you are thinking about taking out a 401 loan is to check with your employer to see if your plan permits loans.

A 401 loan has many advantages. First of all, it can be accessed quickly. In fact, in most circumstances, 401 loans can be obtained within a few days and just take a few clicks of a mouse to obtain.

So, if a house you love suddenly pops up on the market at a good price and you need cash immediately to buy it, a 401 loan may be an excellent option.

Another key advantage of 401 loans is that they typically do not require credit checks and lengthy applications. Why not? Because you are borrowing money from yourself, so you are the only party taking on risk. The loan origination fees for 401s also tend to be low compared with other types of loans. This is another nice benefit of 401 loans.

Additionally, unlike other types of loans, the interest that you pay back on your loan goes to you. You will not have to spend money making interest payments to a financial institution or to another lender.

Withdrawing Money From A Roth Ira

Using a Roth IRA to buy a first home is one alternative to borrowing from a 401 that can be beneficial for some home buyers. Unlike 401s, Roth IRA contributions are made with after-tax dollars. This means at the time of the withdrawal, the funds can be taken out tax-free .

Other reasons why it might make sense to use a Roth IRA to purchase a first home:

Roth IRA contributions can be withdrawn without penalty at any time. After the account has been open for five years, Roth IRA account holders who are buying their first home are allowed to withdraw up to $10,000 in investment earnings with no taxes or penalties. Roth IRA funds can be used to help with the purchase of a first home not only for the account holders themselves, but for their children, parents, or grandchildren.

One last requirement to note is that time is of the essence when using a Roth IRA to purchase a first home: the funds have to be used within 120 days of the withdrawal.

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Drawbacks To Tapping Your 401

There are a few scenarios where tapping your 401 for a down payment might make sense. For instance, you might consider it if you want to:

  • Capitalize on rapidly appreciating home values and/or low interest rates
  • Build equity sooner
  • Obtain a more affordable mortgage payment
  • Secure a home before youre priced out of the market

However, its generally not recommended to use your 401 funds to buy a house, even if the situation appears ideal.

Whether youre borrowing from your plan or taking a hardship distribution, the decision could have an enduring impact on your retirement savings.


If youre taking out a 401 loan, you might miss out on years of additional contributions and employer matching.

And, if you lose or leave your job, you might have to quickly repay the rest of your loan to avoid having it count as an early distribution thatll be taxed and penalized.

Learn More: How to Save for a Down Payment on a House

The Millionacres Bottom Line

Can I Use My 401k to Buy a House? Pros and Cons, Explained

To sum it up, you can’t purchase real estate directly with funds in an employer-sponsored 401k plan if you’re still an active participant in the plan. However, if you have money in a former employer’s 401k plan or are self-employed, there are some good options that can allow you to put your retirement savings to work in investment properties and other types of real estate investments.

Read Also: How To Find My Fidelity 401k Account Number

Uses For The 401k Money

The IRS only allows you to use your money from the 401K for specific reasons. One of which is to purchase a principal residence. However, you have to prove that you do not have any other funds you can use for the down payment. For example, you cannot have a savings account with $10,000 in it just sitting there and expect to take money out of your 401K for the down payment.

The money you withdraw from your 401K must be used specifically for the down payment. You may only withdraw the amount you need for the down payment you cannot just keep the leftover funds. For example, if you must put $10,000 down on a home to purchase it, you may be able to withdraw $10,000 from your 401K. The only exception is if you need the money to pay the penalty and taxes on the money, which we will discuss below.

How To Invest In Real Estate With Your 401k

1- 401k Loans

There are a few options to consider that will allow using 401k to invest in real estate properties. The first one is to take out a loan against your 401k to access funds to finance buying rental properties. The IRS allows you to borrow as much as $50,000 or half of your balance including any outstanding loan balances. This money can be used as a down payment for your first rental property which you can find right here on Mashvisor and in just a matter of minutes! Our Property Finder is a must-have tool for anyone thinking of getting into real estate investing but doesnât know what makes for a profitable investment property for sale. All you have to do is set your criteria and our tool will provide a list of properties for sale that best match what youâre looking for.

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To learn more about our tool and how to use it, read Rental Property Finder: A Revolutionary Tool for Investing in Real Estate.

401k loans used to buy a principal residence can be repaid over a long time period if your plan allows. However, if the loan is used to finance investment properties, then the real estate investor must repay the loan within 5 years if he/she wants to keep it tax-free. Remember, the interest you pay adds to your 401k savings. So with careful planning, you can invest your 401k in real estate and get access to investment property financing with little or no tax consequences.

2- 401k Rollover to a Roth IRA

3- Self-Directed 401k

Read Also: Should You Always Rollover Your 401k

How To Participate In The Home Buyers’ Plan

The Home Buyers’ Plan is a program that allows you to withdraw funds from your Registered Retirement Savings Plans to buy or build a qualifying home for yourself or for a related person with a disability. The HBP allows you to pay back the withdrawn funds within a 15-year period.

You can withdraw funds from more than one RRSP as long as you are the owner of each RRSP account. Your RRSP issuer will not withhold tax on withdrawn amounts of $35,000 or less. Some RRSPs, such as locked-in or group RRSPs, do not allow you to withdraw funds from them.

Certain conditions must be met in order to be eligible to participate in the HBP, including the following:

What Are The Borrowing Limits For A 401

Can I Use My 401k To Buy a House?

In general, you can only borrow up to 50% of your vested account balance or $50,000, whichever is less. Some plans may offer an exception if your balance is less than $10,000 you may be allowed to withdraw the entire amount. With a withdrawal, there are no limits on the amount, assuming your plan allows you to do so.

Also Check: Can You Transfer Your 401k

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