Should I use my 401(k) for a down-payment?
I am looking into first time home ownership and considering using my 401(k) ( traditional) to pay the down-payment/associated fees. It was created with a previous job and is not invested aggressively. In fact, with the annual fees, it is (very slowly) losing money. I have approximately $14,000 in it, accrued over 5 years. We are looking at a moderately priced home in an booming area and realize we have a small window to get into the real estate market. We don't want to be house poor, and aren't looking for a forever home. Rents in the area also trend the same as, if not higher, than what our potential mortgage would be. I have since started a new job and am currently contributing 5% to a new 401(k) and the company matches 3% of that. I know it's never good to withdraw early, but I feel like it could be the right decision in this case. Thanks!
While most people argue against the use of an retirement accounts for purchasing a home, I think it can be a good use of the funds if the situation is right. The fact you are currently contributing to a retirement plan is one of the factors I would want to see, although I'd like to be able to calculate what your current course to retirement would look like to make sure removing money from the 401(k) won’t harm you. If you are on track with your retirement without the $14,000 then using it for a house would likely be a financially beneficial.
Buying a House May Not Be Right
Don’t get too focused on buying, however, that you put yourself into financial difficulty. Sadly, many people are house poor, as you put it, and end up harming themselves financially when buying a home. Look at the house as part of a comprehensive financial plan, rather than allowing fear of missing out on the housing boom to drive you to make a bad financial mistake.
Also keep in mind the mortgage is just one piece of the increased costs you incur when you buy a home. Property taxes, insurance, maintenance, repairs, and a host of other costs are also added on which drive monthly home-ownership costs well above the cost of renting.
Short-Term Home Ownership Costs You Financially
I'd explore is how long you are looking at staying in the home and what you plan to do when you are ready to move. You said it isn't your forever home, but does that mean you plan to be there for eight years or for three? Short-term home ownership is very costly, although most real estate agents will tout its virtues. (They want to make a buck, too.) Buying and selling real estate has extremely high transaction costs, and attempting to avoid those costs by selling yourself puts you at heightened risk for lawsuits. If you are not planning on being in the home for at least 6 years, then don’t buy a home.
Close the Old 401(k) Either Way
If you decide not to buy a home, consider rolling the old retirement account over to an IRA or into the new company's retirement plan. Your statement about the account being invested poorly and having high fees means you are being financially harmed by leaving the money where it is.
Rolling it to an IRA could also give you access to up to $10,000 for the house down payment penalty-free, which could make a lot of sense depending on your tax situation. Assuming you use $10,000 for the down payment, rolling to an IRA first will save you $1,000 in unnecessary IRS fees.
Be Careful or Get Professional Help
If you want help in making the decision or rolling the account over, please reach out to me. If you do it on your own, be careful to closely and meticulously follow the rules. And make sure you know the consequences of the boxes you will need to check. For example, if you select the box where the old plan cuts you a check for the rollover, you will only get a check for about $11,000 as 20% will be sent to the IRS. You must still deposit the full $14,000 into the new IRA account, however, within a 60 day window. Messing up on any of the rules will cause you to incur income taxes plus a 10% penalty on the money.
Consider a 401(k) loan
Another option would be to consider a loan from your current 401(k). Unlike what most people believe, loans from a 401(k) don’t actually reduce your retirement funds. They just change what you are invested in. There are other potentially negative consequences, however, including the opportunity cost of not being invested in the stock market and the risk of needing to come up with the money quickly if you leave your job.
A loan might be a good option assuming you:
Adjust your 401(k)’s investment allocation appropriately.
Check the plan documents to make sure you won’t limit your ability to contribute.
And are able to mitigate the other risk factors such as a potential job loss.
If you’d like help and guidance on the decision, please schedule a meeting.