Friday, February 20, 2015

Should I Use My 401K Money To Buy A Home

Financial Experts have said over and over that real estate is one of the best investments people can make.  They also talk about diversify (not having all your eggs in one basket).  We have been through a rough time over the last 4-7 years in the real estate industry with foreclosures and short sales, many people loosing their home, and many people are skeptical about investing in real estate again.  Even during the bad times experts were still saying real estate is a strong investment.  Now we are seeing a large number of people using their 401K's as down payments to get back into real estate as prices are starting to go up and interest rates are still low.  So the question is that a good idea or not.
Everyone is different and every households finances are different so it is always wise to talk with a financial planner when making any kind of decision about what is best with regard to your retirement accounts.  But below are things to consider:

401K's are a way for you to save money tax exempt for your retirement and only have tax due as you withdraw the money.  The idea is that by the time you need that money you will be in a lower tax bracket than you are today.  And all experts that I have talked to feel that anything you do to save for retirement is a major step forward.  Several things happen when you use money from your 401K to buy a home:

  • There will be an early penalty for the money you withdraw, usually before the age of 59 1/2. This is usually 10% of the amount you withdraw.  So if you withdraw $20,000 10% of that is $2000.00 which would be the penalty.
  • In addition, you will usually have the opportunity to take the money out with tax deducted or not.  If you have the tax deducted (usually at the rate of your current tax rate) it will either come out of your $20,000 or you will have to pay it at the end of the year when you file your taxes.  Let's say you're in a 15% tax bracket you will need ($20,000 X .15% =$3000.00)  so in order to draw $20,000 out to buy a home you will really be spending $25,000 of your retirement account.  (Some 401K programs offer a loan program in order to borrow money usually from your 401K to purchase a home.  Check with your HR department to see what rules your 401K has)
Some programs offer a loan against your 401K to purchase a home, etc.  This allows (in most cases) you to use the money without early withdrawal penalties.  Sometimes they charge a small interest rate but it often goes back to you in your 401K account.  (Again check with your HR department to see how your 401K works)

Once you know the full cost to you for taking out money from your 401K you are now armed with the information needed to talk with a lender.  (We have some terrific lenders that offer and find just the right loans for you)  

When meeting with the lender you want to understand what types of loans you qualify for and how they work.  Ask your lender to explain the ones that best meet your needs and keep asking questions until you understand exactly what you are getting into.  You will also be able to see if you put more down (by using your 401K) what does that mean to you over the life of your loan.  Question is how much money do I need to purchase a home, down payment, closing costs, inspections, etc. and if I don't already have that money saved should I use my 401K to buy a home or if I do have the cash saved what would it mean to my overall costs to put more down.

Buying a home is usually a good investment, but making the right choices on how to go about it can often  make the difference of a good investment or a great investment.

If you have any questions on this blog or any other questions please feel free to call either of us for more information.  Our goal is to have you make a well educated decision and truly understand what your choices are.  This is a major purchase and it shouldn't be made without understanding your options.               Steve 916-425-110        Sandy 916-544-2066
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