How I Bought a House with My 401k
We all know how expensive it can be to buy a house in the city, so when the time came for me to buy my first house, I decided to use my 401K.
How you might ask? Through some sorcery magic that they don't teach you in school.
First, what is a 401k?
A 401(k) plan is a tax-deferred account usually set up by your employer and funded through employee contributions. Basically, it's the government's way to incentivize you to save for retirement so that they don't have to support you in the future.
What is a 401k Loan?
A 401K loan is a type of loan you can get from your 401K. :)
You can borrow up to 50% of the value of your account. You pay interest on the loan, but the interest is paid to yourself. Crazy right? I asked this question at least 3 times with my 401k benefits manager. You're effectively shifting money from one pocket to another.
The 401k loan is a party for 3 including your 401k benefits manager, employer, and yourself.
Once you take the loan out, your employer will deduct the scheduled loan payments directly out of your paystub until you pay off the loan.
Because the your employer is involved, you must pay the entire amount of the loan off within 60 days after leaving your current employer. If not, you may get slapped with a 10% early withdrawal fee, income taxes, and oh btw they kept the other 50% of your 401k for a reason.
So, if you plan on quitting your job soon then you may consider tapping into your emergency fund instead—it won't have any strings attached!
How do you get money out of your 401k?
This step varies by your 401K benefits manager, but it's pretty straight forward for most. Generally, here's what you do:
- Log into your 401k benefits manager
- Search for 401k Home Loan
- Set the amount you'd like to withdrawal and the payment terms (# of years)
- Apply for the Loan
- Submit Loan Paperwork (Proof of Purchase, Employer Notice, etc.)
- Pay a small set up fee (Mine was around $75)
After you submit the load paperwork, it can take a ~2 weeks for the funds to actually hit your account. So be sure to build that lead time into when you actually need to close on the home.
Why tap into your 401k for your house?
The 401k loan helped us preserve our Emergency Funds, while providing the additional funds we needed to make the downpayment. It also meant that we didn't have to borrow as much from the bank and pay interest on top of that amount.
We were also lucky that we took the 401k loan out before the market really started to tumble. Now we're paying the loan back into our 401k at a time when the market is lower than when we took it out.
That may not always be the case and was an unexpected benefit for us. A weak performing stock market may be a good time to take out this loan.
On the flip side, you could miss out on some gains in the stock market if you borrow from your 401k.
If you have a 401k with some money saved up, consider using it as a part of your down payment.
The 401k loan is a great way to access some extra cash for a home downpayment.
It's a relatively straightforward process and may provide the extra cash you need to buy your first (or third) home. I'm not a financial advisor though, so you may want to vet this further with your 401k manager and/or a financial advisor to see if it's right for you.
Happy House Hunting!