{"id":3086,"date":"2023-06-30T07:28:43","date_gmt":"2023-06-30T11:28:43","guid":{"rendered":"https:\/\/www.deeds.com\/articles\/?p=3086"},"modified":"2024-04-25T23:17:36","modified_gmt":"2024-04-26T03:17:36","slug":"buying-a-home-by-pulling-from-a-401k-youre-not-alone","status":"publish","type":"post","link":"https:\/\/www.deeds.com\/articles\/buying-a-home-by-pulling-from-a-401k-youre-not-alone\/","title":{"rendered":"Buying a Home By Pulling From a 401(k)? You\u2019re Not Alone."},"content":{"rendered":"\n
\"\"<\/figure>\n\n\n\n

The average employee\u2019s 401(k) account isn\u2019t what it used to be. Consider people with money in Vanguard employer-sponsored 401(k) retirement accounts. Their precious retirement savings drooped 20% (year-over-year) in 2022.<\/p>\n\n\n\n

A person with a balance near the median (at the midpoint of all account holders) held $27K in 2022 \u2014 about $8K less than in 2021.<\/p>\n\n\n\n

This isn\u2019t just about falling stock values. Accounts are also down because some people need to pull money out for housing costs \u2014 either rents, or down payments on homes.<\/p>\n\n\n\n\n\n\n\n

Does Pulling 401(k) Money Into a Down Payment Make Sense?   <\/h2>\n\n\n\n

We are not financial advisers, so we can\u2019t say a particular strategy makes sense in a given situation. We can, however, make a general observation. Gathering a down payment can be very difficult when home prices are high and interest rates are rising. If you lack the cash for a down payment, resorting to retirement funds could be the only way to become a homeowner.  <\/p>\n\n\n\n

If you have money in a 401(k) or in an individual retirement account, you may withdraw money whenever you need to. The best way to do it is to call a representative and set some of the funds aside as cash, so they are ready to be transferred to your regular bank account.<\/p>\n\n\n\n

But isn\u2019t raiding a retirement account risky?<\/p>\n\n\n\n

Taking early withdrawals will pare down your retirement savings account. You\u2019ll be able to invest more later, but for now, the withdrawn money won\u2019t be there, and it won\u2019t have a chance to rebound with the market.<\/p>\n\n\n\n

On the other hand, you\u2019ll be buying a home with it. If ever there were a good reason to tap funds, that would be it. And an investment in a home is highly likely to grow, assuming your new home appreciates in value over the years.<\/p>\n\n\n\n

Granted, a retirement account is supposed to stay in place, helping you save for a comfortable life in your senior years. But let\u2019s face reality. Getting a home rather than renting is also key to having autonomy and equity \u2014 both very important factors for getting older on your terms.<\/p>\n\n\n\n

\u261b But is this really the right time to buy? Couldn\u2019t the real estate market go down from here? If you have concerns\u2026Read our take on <\/strong><\/em>protecting the value in your home equity<\/em><\/a>.<\/em><\/strong><\/p>\n\n\n\n

What Are the Penalties for Pulling Money Out Before Age 59\u00bd?<\/h2>\n\n\n\n
\"\"<\/figure>\n\n\n\n

If you are at least 59\u00bd years old, you can pull money from your retirement account. The Internal Revenue Service deems everyone who turns 59\u00bd eligible to retire, so withdrawing from these accounts is not penalized.  <\/p>\n\n\n\n

Account holders with 401(k) and regular retirement plans face penalties if they make withdrawals before turning 59\u00bd, except in times of certain life events or hardships. If you are younger than 59\u00bd, and withdraw anyway, there\u2019s a penalty for an early withdrawal.<\/p>\n\n\n\n

You can take up to $10K penalty-free if you\u2019re doing it for a first-time home purchase. At least that\u2019s some help. Of course, $10K doesn\u2019t go very far in today\u2019s real estate market!<\/p>\n\n\n\n

\u261b <\/em>Definitions:<\/em><\/strong> First-time buyers are defined as those who (personally, or their spouses) had no ownership interest in their primary residence for the most recent two years before they close on a home. These people may pull up to $10K from their individual retirement accounts to build, rebuild, or buy a home, as long as they close within 120 days of the withdrawal.<\/p>\n\n\n\n

Moreover, the money you take out of your retirement funds will be counted in your income for the tax year. Yes, funds in a 401(k) or a regular individual retirement account get taxed when they\u2019re withdrawn. This means you\u2019ll report the withdrawn funds on IRS Form 1040. Also check out Forms 5329<\/a> and 590-B which pertain to the 10% tax penalty on an early distribution of retirement account funds.<\/p>\n\n\n\n

Taking retirement funds as income could push you into a higher tax bracket. So, tax time could produce unwanted surprises. Plan carefully. Talk with a tax professional to understand the tax consequences of withdrawing funds from your retirement accounts.<\/p>\n\n\n\n

Can I Withdraw Now, and Rebuild the Retirement Account Later?<\/h2>\n\n\n\n

Yes, you can. Later, after you become a homeowner and have settled into a predictable pattern of income and expenses, you\u2019ll know what you can afford to set aside for retirement. At that point, you could make higher contributions to your retirement account in order to rebuild it.<\/p>\n\n\n\n

Do keep in mind the limits on your allowed contributions each year:<\/p>\n\n\n\n