Can You Borrow Money From a 401k to Buy a House?

Money in a 401k retirement account can be borrowed for the purchase of a house. The account holder can use the money in the account for whatever reason, but needs to be wary of the tax implications and penalties.

Rules

People can borrow half of the money in their 401k or $50,000, whichever is less, toward the purchase of a home. Borrowers have five years or longer to pay the money back to their retirement accounts, depending on whether they are a first-time home buyer.

Advantages

Home buyers using a 401k do not face a credit check since they are borrowing their own money. The interest rate is typically less than you will get from a bank, and the interest is tax free. It's typically easy, requiring only a phone call or a filling out a simple form.

Disadvantages

The loan will slow the pace of your retirement savings. Payments are added to 401k deductions, so your take-home pay will be less and, if you leave your job early, you could face a tax hit if you don't pay the amount back within 60 days.

Other options

Save before buying. Instead of borrowing from a retirement account, lessen the amount put into that account each month. Save that money for the down payment. In addition, borrowing money from a relative or friend could be another option.

Expert advice

Home buyers should seek expert advice when dealing with 401k retirement accounts. Laws and regulations change, and a financial adviser or tax expert should be able to keep track of those ongoing changes and how they affect you.

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