Wouldn’t it be great if you could borrow money from your 401k to buy a new home and not have to worry about the loan payments later? Well, by law you cannot put your 401k toward personal purchases, but there are ways around this and when it comes to buying a home you should definitely consider this option.
Current 401k Loan Rules
Prior to the 2017 tax law changes, your 401k loan could be used to purchase a primary residence. Current rules state that you are limited to one loan, which must be repaid within 60 days of the purchase date. You cannot borrow against future income and you cannot take the loan if you’ve contributed to an IRA or if your company has an in-house 401k plan.
With the current 401k loan rules, any loans that you take out of your retirement account are limited to a maximum of 50% of the total amount. For example, if you have a $40,000 balance in your retirement account, you could only borrow up to $20,000.
What are the benefits of using a 401k loan to buy a home?
If you are planning to buy a home and want to use your retirement savings in some way, a 401k loan may be the best option for you. The loan is a low-cost and fast access type of borrowing that will allow you to take care of expenses on your home sooner. For example, if you have three months worth of living expenses saved just so that you can start your new life as soon as possible, then using the 401k loan would reduce the amount you need to save. On top of this benefit, it also helps with establishing equity in your home because the interest on the loan is tax deductible.
If you are considering borrowing money from your 401k plan, it is important to know what the benefits are. There are many advantages that come when using a 401k loan to buy a home. If you are between jobs and want to stay in the same area and still have access to affordable living, then this is the perfect solution for you.
Frugal Tips for Using Your 401k Loan
When planning to buy your new home, you may want to consider using funds from your 401k. If you do, there are a few things you will need to keep in mind before taking out the loan. Check the terms and conditions of your loan and make sure it will not change the amount of contributions or taxes withheld from your paycheck.
You can borrow up to the amount of your 401k loan. In fact, you can even borrow it from multiple retirement accounts. There are many ways to figure out how much you need, such as comparing your current house payment with what you’ll pay in mortgage or rent payments over the course of your loan.
How to apply for a loan
There are a few things you should know before applying for the loan. The first is that the loan will come out of your 401k and not your regular checking account. The second is that the debt you’re taking on with this loan will be tax-deductible, which will save you money in retirement.
It can be a tricky undertaking, but if you’re serious about purchasing your new home, you’ll want to take the time to understand how to apply for a loan. Your 401k loan options are great because they typically lower the interest rate and have flexible repayment plans.
Alternatives to the 401k Loan
This blog post is telling you how to use 401K money as a down payment and not borrow any more money. There are some limitations with the 401k loans, such as the 10% penalty for early withdrawals and that you can’t take a loan from your old 401k plan before you retire.
If you are considering taking a 401k loan to purchase a new home, there are several alternatives that may help. You can sell some investments, borrow from your 401k without impacting the rest of your retirement savings, or transfer money out of the company 401k and into an IRA.
It’s hard to say what you should do. But I encourage you to read more about your options and figure out the best decision for you. One of the biggest things you need to keep in mind is that when you take a loan, it’s much harder to pay it back.
You may want to borrow money from your 401k in order to buy a new home. This is where you will save on interest rates and the IRS will not be able to garnish your retirement savings. For some, this may be a good option but you should make sure that you have enough money left in your account to not incur any penalties or other problems.