Can I Use My 401(k) To Buy A House? (2024)

FAQs

Can I Use My 401(k) To Buy A House? ›

Can You Use a 401(k) to Buy a House? The short answer is yes, since it is your money. While there are no restrictions against using the funds in your account for anything you want, withdrawing funds from a 401(k) before age 59½ will incur a 10% early withdrawal penalty, as well as taxes.

Borrowing 401(k) funds to buy a home

You can take $10,000 or half your vested amount in the plan (whichever is more), up to a maximum of $50,000. This type of loan is provided by your 401(k) plan provider — double check that they do allow it — and they will set the interest rates for it and the loan term.

If you have a 401(k) plan at work, though, you might have a convenient source for down payment funds. You are allowed to borrow money from this retirement account for a down payment.

The administrator will likely require you to provide evidence of the hardship, such as medical bills or a notice of eviction.

Yes, you can use your 401(k) to buy a house without penalty, provided you use a 401(k) loan rather than a withdrawal. Unlike a 401(k) withdrawal, a 401(k) loan is not subject to a 10 percent early distribution penalty from the IRS. The money you receive will not be taxed as income.

One of the easiest ways to lower the amount of taxes you have to pay on 401(k) withdrawals is to convert to a Roth IRA or Roth 401(k). Withdrawals from Roth accounts are not taxed.

A 401(k) loan is limited to the lesser of $50,000 or 50% of your vested balance. Of course, you can only borrow as much as you have available in your 401(k), so if your balance is smaller, you won't be able to take out a loan for the full allowable amount.

401(k) loans

Depending on what your employer's plan allows, you could take out as much as 50% of your savings, up to a maximum of $50,000, within a 12-month period. Remember, you'll have to pay that borrowed money back, plus interest, within 5 years of taking your loan, in most cases.

How many times a year can you pull from your 401(k)? There is no IRS limit to the amount of times you can withdraw money from a 401(k) once you reach age 59.5.

What qualifies as a hardship for 401k withdrawal? ›

Understanding 401(k) Hardship Withdrawals

Immediate and heavy expenses include the following: Certain expenses to repair casualty losses to a principal residence (such as losses from fires, earthquakes, or floods) Expenses to prevent being foreclosed on or evicted. Home-buying expenses for a principal residence.

The short answer is yes — if you make a 401(k) withdrawal, your employer will know. This is because your employer is responsible for all aspects of offering your 401(k) plan, including hiring the record keeper.

The legally permissible reasons for taking a hardship withdrawal are very limited. And, your plan is not required to approve your request even if you have an IRS-approved reason. The IRS allows hardship withdrawals for only the following reasons: Unreimbursed medical expenses for you, your spouse, or dependents.

Also, some 401(k) plans may have even stricter guidelines than the IRS. This means that even if any employee has a qualifying hardship as defined by the IRS, if it doesn't meet their plan rules, then their hardship withdrawal request will be denied.

Beginning in 2024, they can take up to $1,000 per year for emergency expenses without incurring the usual 10% early withdrawal penalty.

You may have also heard that you can make a 401(k) hardship withdrawal to buy a house. This isn't true. The benefit of a hardship withdrawal is that it waives the early withdrawal fee. While this is an option if you become disabled or have medical expenses, the IRS explicitly says it's not an option for home buying.

The Internal Revenue Service (IRS) does not allow 401(k) participants to use their retirement accounts as collateral for a loan.

No income tax is due when contributions are withdrawn. However, contributions to traditional 401(k) accounts are made with pretax dollars. This means that any withdrawn funds must be included in your gross income for the year when the distribution is taken.

The most common way is to take out a loan from the account. This is usually the easiest and quickest way to access your funds. Another option is to roll over the account into an IRA. This can be a good choice if you want to keep the money invested for growth.

There's a trick amongst financial advisors that's rarely discussed, and it can reduce the tax you pay on 401(k) distributions after retirement. It's called variable life insurance.

Is it better to borrow from 401k or bank? ›

The interest rate is typically lower.

When you borrow against your 401(k), it is a loan, which means you are required to pay it back with interest. However, the interest rate is usually much lower for a 401(k) loan than for a bank or alternative lender's loan.

COVID-19 Hardship Withdrawal for 2020

The ability to withdraw up to 100% or $100,000 of your account balance, whichever is smaller. The ability to spread out any taxes due over three years. If you pay the funds back into your account within three years, it will be considered a rollover and not subject to taxes.

Borrowing from your own 401(k) doesn't require a credit check, so it shouldn't affect your credit.

Acceptable Documentation

Lost Employment. • Unemployment Compensation Statement. (Note: this satisfies the proof of income requirement as well.) • Termination/Furlough letter from Employer. • Pay stub from previous employer with.

In some cases, you might be able to withdraw funds from a 401(k) to pay off debt without incurring extra fees. This is true if you qualify as having an “immediate and heavy financial need,” and meet IRS criteria. In those circ*mstances, you could take a hardship withdrawal.

For example, some 401(k) plans may allow a hardship distribution to pay for your, your spouse's, your dependents' or your primary plan beneficiary's: medical expenses, funeral expenses, or. tuition and related educational expenses.

Is my 401(k) an asset? 401(k)s are nonphysical assets and your lender will likely take them into consideration when assessing your mortgage application. Be sure to consult with a financial advisor to make sure there won't be negative consequences if you use your 401(k) to buy a house.

Hardship distributions

A hardship distribution is a withdrawal from a participant's elective deferral account made because of an immediate and heavy financial need, and limited to the amount necessary to satisfy that financial need. The money is taxed to the participant and is not paid back to the borrower's account.

A 401(k) is usually included on the list of assets mortgage lenders look for, alongside bank accounts and other savings. Any money you have in your 401(k) could be treated as an asset, less anything you owe toward a 401(k) loan.

Do I have to pay taxes on my 401k after age 65? ›

Yes, you will owe taxes on 401k withdrawals after age 66. This is because even though you have reached retirement age, the funds are still classified as ordinary income and are subject to income tax.