If you want to buy a home but you don’t have all the money you will need for a down payment, you can use 401K money to buy a house. If you have money in a 401K then you are investing in a retirement fund that your employer has made available for you. You may be the only contributor, but you employer may also make matching contributions to the account on your behalf. If you choose to take the money out of the account you will have to pay a penalty for the early withdrawal of the funds and you will have to pay taxes on the funds as if they were income.
You can use 401K money to buy a house by cashing out the funds or by borrowing against the account. If you cash out the funds it means that you make a withdrawal and pay the penalties and taxes on the money that you take out if you are required to by the Internal Revenue Service (IRS) or the account manager. You can borrow the funds and you are actually borrowing from yourself. You will not have to have a good credit report, nor will you have to pay a high rate of interest. You will make payroll deductions to repay the loan and you will have to make them in high enough payments to repay the funds in a maximum of five years.
The maximum of $50,000 or one-half the account balance is what you can use 401K money to buy a house when you take out a loan on the retirement fund. The advantages are that you are borrowing from yourself and you will pay a lower rate of interest. Usually the account manager will assign an interest rate that closely matches what the fund would draw if placed in other investment options. The interest is free from taxation and you will only have to meet the qualifications of the account manager in order to access these funds.
There are also disadvantages when you take money from your retirement fund. If you are unable to repay the money, then you have lowered the amount of money that you will have available for use when you are no longer able to work. If you have not repaid the money and you leave the employment of the firm, then you will have 60 days to pay the money in full or pay penalties and interest on the money you have withdrawn. You will have less money available in your take home pay, but you will have to keep up the regular deductions to the 401K, as well.
If you have the money to repay the loan, then try to save the money instead of taking out a loan. You should be able to save up enough to make a down payment within a short amount of time without going into debt. When you want to tap into your retirement account you should always seek the advice of someone who specializes in that financial field. The rules continually change as the IRS adjusts the contribution amounts for inflation and make other changes to the retirement fund rules. Before you can use 401K money to buy a house make sure that you have explored all your options and that you fully understand the consequences of tapping into the account.