Ask Kim
Tapping Your 401(k) for Cash
I'm 26 and planning to buy a co-op apartment. Can I tap my 401(k) retirement account for the down payment? Are there any penalties I might consider?
By Kimberly Lankford, Contributing Editor, Kiplinger's Personal Finance
November 24, 2004
I'm 26 and planning to buy a co-op apartment. Can I tap my 401(k) retirement account for the down payment? Are there any penalties I might consider?
Although a special rule allows penalty-free withdrawals of up to $10,000 from an IRA to buy a first home, there's no such break for 401(k)s. In fact, you generally can't withdraw from a company plan unless you're at least 59½ or leave your job.
You probably can, however, borrow from your account. The law permits you to borrow up to half of your account, to a maximum of $50,000.
You'll probably get a sweet interest rate on the loan, though you can't deduct the interest on your tax return.
Weigh the decision to borrow against your 401(k) carfeully. If you leave your job, your loan may be due back immediately. If you are unable to repay, the balance is treated as a taxable 401(k) distribution. And you'd get hit with an extra 10% early-withdrawal penalty because you're under age 55.
For advice on buying a home, including wading through your mortgage options, see our Home Buyer's Survival Kit.