Skip to main content

logo

401k Withdrawal Checklist

Using 401k Assets For Your Downpayment

If you know me, I take buying a home as well as my client’s investments very seriously, so before making an “off-the-cuff” decision to borrower against or cash-out a 401k, I recommend you meet with a professional and discuss a few crucial items.

CLICK HERE TO DOWNLOAD THE CHECKLIST FOR USING 401k ASSETS TO PURCHASE A HOME
(BUT – Please keep reading… This is important information that you understand!)

There are two ways to access your 401k assets to make a down payment on a house.
(1) A 401k Loan
(2) A 401k Hardship Withdrawal

“I think the bigger question is not, ‘How’, but ‘Should You Use 401k Assets To Purchase A House?”

The IRS looks at 401k assets as long-term investments, and therefore, accessing 401k assets can be risky business due to the potential tax and penalty consequences. Of the two options above, the most common and “safe” approach to accessing 401k assets to purchase a home is through a 401k Loan.

CLICK HERE TO DOWNLOAD THE CHECKLIST FOR USING 401k ASSETS TO PURCHASE A HOME
(BUT – please keep reading … You need to know this!)

A 401k loan is less costly. You simply forgo earnings on the amount borrowed, and pay back the amount borrowed at the rate you were earning the money. From a mortgage pre-approval standpoint, you also need to remember that your 401k loan will be added to your liabilities, increasing your debt-to-income ratio. I help each one of my clients evaluate their situation on a case-by-case basis, so it is hard to say, “One size fits all here“.

What Are the Risks?

The major risks outside of paying fees for a 401k loan, is that in the event you lose your job or change employers, you may be required to pay back the loan entirely within 60 days. The loan may now be treated as a withdrawal and you are subject to fee, penalties, and tax consequences.

As for a hardship withdrawal, I will first advise you to speak to your tax professional and investment advisor in addition to listening to me. With a 401k Hardship Withdrawal, you pay taxes, penalties, and forgo any future earnings on the money you withdraw. As I mentioned previously, the safest approach to accessing 401k assets is through a 401k loan, but it is wise to consider both options as you research the best financial strategy buying a home.

There are a few factors that I advise my clients to consider before making accessing their 401k assets.

(1) Contact a real estate professional to evaluate “real time” market stats in your community
(2) Contact a tax professional to see the “Total Cost” of a withdrawal
(3) Contact your 401k investment bank for their guidelines on 401k withdrawals and loans
(4) My best advice - Consider asking a relative, friend, or employer to “gift” your the money for a down payment versus taking a costly loan or hardship withdrawal. Interest paid is money lost!

It is important that you contact your 401k bank to request and apply for the loan or withdrawal prior to submitting an offer on a home. Often times it can take 4-6 weeks for your bank to issue you a check or wire transfer.