January 10th, 2020 12:23 PM by Elizabeth Washburn
ACCESSING THE 401(K)
Before you race to the bank and cash-out your retirement to purchase your castle, take a few minutes to assess the implications outlined below.
LIQUIDATION
Ordinarily, you can't take money from your 401(K) plan until you retire, leave the company or become disabled, but many accounts permit certain “hardship withdrawals” when there is an immediate financial need. While hardship withdrawals are allowed by law, your employer is not required to provide them in your plan. Sometimes this "hardship withdrawal" includes the purchase of a principal residence. If unsure as to whether yours does, check with your employer’s human resources department.
The drawback of liquidating in this manner is that the funds are immediately taxable since they were saved tax free. Likely they would be taxed at your current tax rate, but it could be higher if the fund liquidation puts your income into a higher tax bracket. There is also a penalty, typically 10% of the funds withdrawn. The exact amount of the penalty is spelled out in your plan.
LOAN
Another option is borrowing against your 401(K). Often you can borrow as much as 50% of your account balance. You pay interest on the loan, and the interest is credited back to your account. Sounds great, eh? The money you receive is not taxable either (as long it is paid back), and there is no penalty. Most plans offer anywhere from five to thirty years to pay the loan. In a perfect world, it's a perfect plan!
When you set this ball in motion, it is very difficult to stop so make sure you lender has seen the account where you plan to deposit the funds BEFORE you do it. A good broker has an eye for anything funky on a bank statement. Also, keep a copy of ALL the paperwork. This includes applying for the liquidation, any correspondence from the bank, any check or wire record, and the printout from the bank showing the funds transferred into your bank account. Be in full communication during the liquidation process so nothing gets in the way of obtaining your new home.