Although you might be thinking about using your 401(k) in order to buy your new home, you need to be aware of all your legal options before arriving at any final decisions.
Withdrawing from Your 401(k) Plan
Your 401(k) plan is supposed to provide you with a nest egg of sorts and ensure that you are in a financially sound position when the time comes to retire. A certain percentage of your paycheck, prior to taxes, goes into your 401(k) retirement savings plan. Meanwhile, since you are contributing a portion of your wages, the funds that are deposited into your 401(k) do not get taxed until you withdraw the money from the account.
The 401(k) is meant for your retirement, but you can still borrow from the fund prior to leaving your job for good. For example, you can borrow from your 401(k) by taking out a loan to cover the costs of a down payment on a home purchase. There are some limits: you can only borrow a maximum of 50 percent of your total 401(k) balance and the total loan amount is capped at $50,000. You will then have to pay back the loan – essentially paying yourself as you make new deposits into the 401(k) – over the next few years.
Whether it’s to purchase a new house, provide investment capital in a business venture, cover emergency medical bills or alleviate debt concerns, borrowing from a 401(k) plan is something that plenty of people do. In fact, some estimates indicate that more than one-quarter of all participants in 401(k) plans have outstanding loans.
However, before jumping at the chance to finance your new home by withdrawing from your 401(k) plan, keep in mind that there are some potential negative consequences to withdrawing early from your 401(k). For instance, if you happen to lose your job prior to fully reimbursing your 401(k) fund, you may be required to pay back the entire loan immediately, with failure to do so resulting in costly fees and taxes.
There is also the risk that you are putting your later financial security in jeopardy by taking money from a fund that is specifically designed to provide you with something to fall back on when you reach your Golden Years. Generally speaking, you may not want to think solely about short-term benefits to the detriment of long-term considerations – especially when it comes to your financial future.
For additional information, access the Yahoo.com article, “Money Minute: Should I Tap My 401(k) to Buy My First Home?”
If you are thinking about buying a home in New Jersey, Joel R. Spivack, Esq. is an experienced real estate attorney who can help you determine your best course of action, including financing options. Contact Mr. Spivack now to schedule a free consultation.
