Penalty for using my 401k for down payment - What will the penalties be for using my 401k for a down payment on a primary residence for my first home? Is it true that I can withdraw my 401k penalty free if I use this money for my home purchase? Are there any tax implications to use my 401k for the purchase of a new home? How can I get around the penalties and/or taxes and avoid having to pay them? These are many of the different questions and more common questions that are asked by consumers about using their 401ks to apply towards the purchase of a home. Read on to find out the answers to these questions and many other questions about 401ks and early withdrawal rules and guidelines.
The IRS allows for withdrawal of money from your 401k to purchase a primary residence. However, your employer does not have to permit a hardship withdrawal or any type of withdrawal for that matter. Some employers will permit hardship withdrawals and/or loans against a 401k while others will not. If your employer does permit a hardship withdrawal and your request is approved, then this money will be subject to a 10% penalty if you are under age 59.5 and you will still be required to pay taxes on this money as it will be treated as normal income since the money was put into the account pre-tax. Therefore, a loan against your 401k for down payment is more recommended than a hardship withdrawal but if that is your only source and/or only way to purchase a home then you need to consider a withdrawal still.
Besides the penalties listed above, there is also the "opportunity costs" to consider. When you withdraw from your 401(k) those funds are no longer gaining interest, you may miss out on a market opportunity that could significantly increase the value of your investments. The opposite is also true with those funds withdrawn, you may miss out on a market change that would have decreased the value.
If you decide to withdraw from your 401K to secure down payment money be sure and let your mortgage broker know about the 401K loan at time of application. The monthly payment on the 401K loan will count against your monthly debt ratios and must be accounted for by you mortgage broker to structure the loan properly.
Top Sources for Down Payment - With home prices souring in the last several years, it has become harder to find the recommended 20% for down payment when purchasing a home- even in a cooling market.
Do not despair- there are actually many several sources that you could use to help with your homes down-payment.
One commonly acceptable source of down payment are actually GIFTS from family. In some cases you’ll have to show that you have at least 5% of your own money invested into the deal; mainly because lenders like to see some personal investment, or attachment, to the property. But beyond that, you’ll only have to document the source, transfer, and receipt of the gift funds, along with a gift letter used to document that the gift is, just that- a gift, and that there is no expectation or requirement for repayment of said gift.
You may also qualify to use money from your 401K as a down payment on a residence. However if you take a loan out against your 401K the monthly repayment amount will count against your Debt To Income Ratios (DTI). Make sure and let your mortgage broker know about any 401K loans that you may have taken out so they can structure the loan properly.
Many people will use the money they get back from the IRS from their tax returns to apply towards a down payment on a home. While this will usually not provide you with a big down payment, it can often provide enough of a down payment to possibly help you qualify for a mortgage loan.
Another way to raise funds could be to sale off an asset. Whether it be a collectible, used car, jewelry, or pricey artwork- anything of durable value can be sold and used as a source of funds for closing. You'll simply have to document the sale with a receipt.
You can even use assets for liquid reserve requirements if you're able to properly ascertain and document it's value, like with an insurance policy.
One source for a down payment is savings or investment. It can be prudent to wait to buy a home until you have saved enough for a down payment. The higher your down payment the lower your leverage and risk.