One of the 401k questions that are frequently Googled is: Can I use my 401k to buy a house?
The short answer to this question is yes. There are two main ways you can access your 401k assets to make a downpayment on a home:
1) 401k loans and,
2) 401k hardship withdrawals.
However, a second, even more, important question that should be asked is:
Should I use my 401k to buy a house?
Taking money out of your 401k – via hardship withdrawal or loan – is a risky business no matter what the purpose. The IRS clearly intends for 401k money to be saved for retirement and makes both options costly.
With a hardship withdrawal, you will pay taxes, penalties and forgo future earnings on the money you withdraw. A 401k loan is less costly – you forgo earnings amount borrowed – but still quite risky in the context of your overall financial and retirement plan.
A major risk with borrowing from your 401k is the risk of job loss. If you lose your job or change employers, you generally must pay back the loan in full within 60 days. Otherwise, the loan is treated as a withdrawal and subjected to the same taxes and penalties.
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On top of this, you will need to consider the housing market you are buying into and its long-term prospects for home appreciation. In the housing boom market of the early 2000′s moving retirement savings from a 401k into a home purchase in a rapidly appreciating market may have seemed sensible.
Today, however, few housing markets are “hot” and most are stagnant or declining. Understand that homeownership is not a substitute for accumulating a retirement nest egg.
In summary, it is possible to use a 401k to buy a house, but the costs of going this route may not be worth it. You should first explore other options including borrowing from family, delaying the purchase until other savings can be used, or offering a smaller downpayment in conjunction with buying private mortgage insurance.