Can I Use My 401k to Buy A House?

Can I Use My 401(k) to Buy A House?

One of the questions I get is, can I use my 401k to buy a house? Now every Realtor that’s on my list hates my answer. Because my answer is, yes, you can use your 401k, but you probably shouldn’t.

And the reason is because of this whole thing called the time value of money. You see, you’ve managed to save a bunch of money inside of your 401k. If you start taking that money out to buy something else, it doesn’t get to grow inside of that 401k anymore.

Now, there are provisions that most companies have in their 401ks that allow you to do some first-time home-buyer purchases. In other situations your 401k may allows you take out a loan from your 401k, and I’ve actually done a whole blog post on the dangers of taking out a loan from your 401k —the things that, quite frankly, no one else will tell you—and that is the double taxation that goes on, the dangers of that type of thing.

One of the things that a lot of people don’t realize is, let’s say you just took $20,000 out of your 401k as a loan because you needed it for a hardship, and two months later you lose your job. Well, in most companies, that $20,000 that you borrowed is now all due on your last day. You’ve got to come up with $20,000. If you don’t, it’s considered an early distribution and of course now you’re going to get hit with a 10% penalty on top of ordinary income taxes for those monies that you’ve already taken out.

So the answer, can you take money out of your 401k is yes, you can take money out of your 401k. Should you take money out of your 401k? That depends on your exact situation and in most circumstances, you probably shouldn’t.

But before you start making these decisions, you need to sit down with a qualified financial planner who’s got your best interests in mind. That usually means they’re what’s called a registered investment advisor, not a commission-based planner, and sit down with them and explain to them your situation and get some unbiased advice on that.

I’m Pete Mitchell. I look forward to sharing more on the markets with you later.