Should You Borrow From a 401(k) to Buy a Home?
I’m in my early sixties, have a good job and am socking away the max in my 401(k) plan. I find myself in an unusual situation: I am in extremely good shape in my retirement accounts, but I have little in taxable accounts. In fact, until recently, I was essentially living paycheck to paycheck. I’m a renter and have been thinking that I might want to buy a condo at some point. What’s the best way to come up with money for a down payment? If I needed, say $50,000, should I borrow it from my 401(k) or stop contributing to my 401(k) and start building up my taxable account?
You can usually borrow half of your balance in a 401(k), up to $50,000, and you may be allowed up to 15 years to repay the loan if you’re borrowing for a home purchase. But if you lose or leave your job (say, because you retire), you generally have just 60 to 90 days to pay back the loan or it will be considered a distribution and subject to taxes. (Borrowers who are under age 55 when they leave their job must also pay a 10% early-withdrawal penalty.) Rather than risk the tax bite, reduce the contributions to your 401(k) and save in the taxable account, recommends Tim Maurer, a certified financial planner in Hunt Valley, Md. In cutting back on the 401(k), be sure to contribute at least enough to get the company match. “You never want to cede free money,” he says.
Even after you’ve saved enough for a down payment, you may want to set aside some money regularly in a liquid account so you have access to it in case of an emergency or for an investment opportunity or even a splurge purchase (after all, you’ve already got retirement covered). The best financial planning means diversifying not just within accounts but also among different types of accounts with varying levels of liquidity and tax treatment, Maurer says.
Maurer also points out another option: Taking a distribution from your IRA accounts. Anyone can withdraw up to the amount of Roth contributions tax-free and penalty-free for any reason and at any age, but because you’ve reached 59½, you can withdraw earnings penalty- and tax-free as well (as long as you’ve had a Roth for at least five years). You’ll still have to pay taxes on withdrawals from traditional IRAs (except for any nondeductible contributions), but, as with a Roth, you won’t be subject to early-withdrawal penalties because you’ve reached 59½.
For more information about 401(k) loans for a home purchase, see Roth IRA Rules for more information about tapping Roth IRAs and the special rules for money that was rolled over from a traditional IRA to a Roth.
See our Retirement Savings Calculator for help determining whether you’re on track. See Where to Score the Best Interest Rates on Your Savings for more information about short-term investments.
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