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Can I Use My 401(k) for a House Down Payment?

By Ephrat Livni, Esq. on November 11, 2015 | Last updated on March 21, 2019

You can use retirement savings in a 401(k) plan for a down payment on a home. But you will pay a 10 percent penalty on the withdrawal, and taxes, according to Money Crashers.

There are options, however. So let's look at how you might avail yourself of the money you saved for retirement and make the most of it now.

Roll Over to a Roth IRA

To avoid a penalty on your 401(k) withdrawal, roll it over to a Roth IRA. This type of retirement account takes the least in taxes and penalties on withdrawals. It is also ideal for would-be or new homeowners, as accounts held over five years enjoy privileges that are perfect for property purchases. You may, after the allotted time, withdraw up to $10,000 in earnings to buy, purchase, or repair a first home with no penalty.

If your 401(k) is with your current employer, however, the roll over option is unavailable. Rollovers take some time, so if you do have accounts out there with past employers, get started on the process today.

Borrowing From a 401(k)

Rather than withdrawing from your 401(k), consider borrowing the money on the basis of that account. You can borrow up to $50,000 or half the value of the account and this will probably cost you less than a withdrawal would. While you will pay interest on the loan, you will not pay penalties for withdrawing from the account, nor are taxes due on the borrowed money.

Be warned, however, that this option too has some potential disadvantages. A 401(k) loan is a loan, so if you are borrowing to make the down payment on a property, this will impact your credit and, possibly, your ability to borrow as much as you need for a mortgage.

Also notable, these loans generally have slightly higher interest rates than the prime rate. The interest goes into your 401(k) account, not to the company. But because these loans are associated with the company you work for, you will have to pay the whole amount promptly if you leave your job or you will end up paying the penalty on the amount borrowed as a withdrawal.

What to Do

What is best for you given your specific circumstances? No one can say without knowing the details of your finances and your goals. Talk to an attorney who can go through all of these options with you so that you make the best financial decisions.

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