Your 401K is a great resource of investing for retirement. Many people use their 401k’s as a part of their overall investment strategies, pulling money out of it when it’s needed. When you’re ready to buy a house, you may think that pulling money out of your 401k for a down payment is a good idea. But think again.
Although you should always speak with a financial professional about your money matters, the bottom line is that is probably not the best idea to use your 401k to supply money for a downpayment on a home.
First, your 401k funds are pre-tax dollars. That means that you haven’t paid any taxes on these funds. Your employer will often match the amount of money that you put into your 401k, as an incentive to help you save money for your future. You need to keep your 401k for a certain amount of time before any funds in the 401k become available to you without having to pay any kind of penalty. If you decide to take on the penalty, you can often face a cut to your employer’s match programs as well. This is why you must make this decision wisely.
The Penalties
Anyone under the age of 59.5 pays a penalty of 10 percent to take the money out of the fund. In addition, you’ll now need to pay taxes on this money, because it becomes a part of your adjusted gross income.
Alternative Actions
If you are looking to invest in a property, there may be other options for you rather than pulling money out of your 401k. While some plans allow you to borrow money from it. However, if your only option to get money to invest in a property is to pull money from your retirement account, it may not be the best time to invest in property for you.
Keep It Separate
If you’re younger (say in your 30’s or 40’s) your best option is to have a completely separate account that is used to save for a downpayment and other expenses that you’ll incur when you buy a home. In this sense you aren’t spreading yourself too thin as far as investments go. You should compartmentalize your money. Buying a home is a large investment in itself. Home equity can also be a good source of a nest egg in later years when you need it. However, even if a property will be an income property, it’s never smart to take from one investment account to provide for another unless you’re shifting your focus. You don’t want to reach retirement, only to see that your funds have been depleted and you can’t retire as expected.