Raiding your 401(k) account to purchase a home may seem like a quick solution to securing the funds you need, but experts warn that this decision could have long-lasting negative consequences. According to the Real Financial Progress Index by BMO Financial Group, 30% of aspiring homeowners plan to withdraw funds from their 401(k) plan to finance their home purchase. However, millennials and Gen Zers are more likely to take this route, with 31% and 34% respectively, compared to only 25% of Gen X homebuyers and 16% of baby boomers.
Stacy Francis, a certified financial planner and president of Francis Financial in New York City, strongly advises against using retirement savings for a house. Early withdrawals from retirement accounts can lead to taxes and penalties, reducing the overall amount of funds available for retirement. While there are exceptions for first-time homebuyers to withdraw up to $10,000 penalty-free from their IRAs and 401(k)s, it is still recommended to keep those funds invested for long-term growth.
Taking out a loan against your 401(k) might seem like a better alternative to a withdrawal, but it also comes with its own set of risks. Experts caution that borrowing from your retirement savings can lead to significant financial consequences. In 2023, 3.6% of savers took out hardship withdrawals, an increase from 2.8% in 2022, as reported by Vanguard’s How America Saves 2024 preview.
Tom Parrish, head of lending at BMO, emphasizes the negative impact that early withdrawals can have on your retirement savings. Not only will you be reducing the funds available for your future, but you may also face penalty fees and taxes, diminishing the overall value of your retirement account. Clifford Cornell, a certified financial planner at Bone Fide Wealth in New York, provides an example of how leaving $10,000 in a 401(k) instead of withdrawing it could result in nearly $77,000 more for retirement at age 65 with average annual returns of 6%.
While borrowing against your 401(k) is generally discouraged, it may be a more acceptable option for homebuyers who are in need of immediate funds for a down payment or closing costs. Federal law allows workers to borrow up to 50% of their 401(k) account balance or $50,000, whichever is less, without penalty as long as the loan is repaid within five years. However, failing to repay the loan, especially if you leave your job, can lead to additional financial strain and penalties.
Stacy Francis warns that purchasing a home involves long-term financial commitments beyond the initial down payment and closing costs. Ongoing mortgage payments, real estate taxes, and maintenance costs can add up quickly, leaving homeowners financially stretched. If unexpected challenges arise, such as job loss or financial difficulties, borrowers may find themselves unable to afford both the 401(k) loan and the mortgage, putting them in a precarious financial situation.
While it may be tempting to dip into your retirement savings to purchase a home, the risks far outweigh the benefits. Experts advise against using 401(k) funds for housing purposes and recommend exploring alternative financing options to avoid jeopardizing your long-term financial security. It is essential to carefully consider the potential consequences of raiding your retirement accounts before making any impulsive decisions that could impact your financial future.
Leave a Reply