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.
About the Author
Judy Szablak
With over 30 years in the industry, Realtor Judy Szablak has been on national television for her real estate expertise on the HGTV Network, featured on Martha Stewart Living Radio "Morning Living” , NPR radio as an expert real estate panelist, It’s Relevant News channel, and quoted in the Wall Street Journal for her in depth knowledge of Fairfield County Connecticut real estate.
She was also on the local NPR radio station (WSHU) as a Fairfield County CT real estate expert. Judy has provided multiple online respected news sources with her real estate expertise including The Daily Easton, The Daily Weston, The Daily Fairfield, The Daily Stamford and The Daily Greenwich, as well as in print in the New York Post. She is a weekly Real Estate Columnist for WestportNow.com, another real estate column "Real Estate With Judy” is syndicated through Hearst CT Media Online and seen in The Connecticut Post, The Danbury News-Times, The Stamford Advocate, The Greenwich Time, The Hour, Fairfield Citizen, Westport News, Darien News, New Canaan News and the Wilton Villager.
Judy is also the author of the book, The Art of Buying or Selling a Home, available at all major book retailers. Additionally, Judy has been nationally recognized in a number of national real estate trade magazines, some with distribution to over 1 million members. She was featured in Real Estate Today as early as 1994 for her commitment to, and implementation of technology in real estate. Judy appeared in the Certified Residential Specialist Magazine, as she provided advice on marketing strategies and ethics in the article titled "Marketing Makeovers.”
Judy was also featured in REALTOR® Magazine, regarding image enhancement for Realtors. She was again featured in REALTOR® Magazine, in an article on "Achieving Flow” and operating at optimal peak performance. In another article in the same publication, Judy offered guidance to fellow real estate professionals as she explored the topic of implementing and maintaining personal websites. She has appeared in The Council of Residential Specialists Magazine, which featured her ideas regarding technology. Additionally, Judy authored an article on marketing and technology for the Certified Residential Specialist (CRS) Online Magazine. On two occasions, in 2015 and 2017, she appeared as a featured agent in Top Agent Magazine. I have a few other websites- www.TheCtrealtyBlog.com www.CtHomesAndRealEstate.com www.BestWestportHomes.com www.ThePetitePowerhouse.com www,SzablakConsulting.com
