Can I Take Money Out of My 401K to Buy a House?

by David Rodeck, Demand Media
    The IRS charges income tax plus a 10-percent penalty on early 401(k) withdrawals.

    The IRS charges income tax plus a 10-percent penalty on early 401(k) withdrawals.

    If you have money in your 401(k), you might be able to take it out to buy a house. While the 401(k) is supposed to be used for your retirement, it still offers a few ways for you to take out your money early. Your best option depends on how your employer designed the plan and the amount of money you need.

    Withdrawal Options

    The IRS designed the 401(k) with two options for withdrawals while you are working. You might be able to take a loan or a hardship withdrawal from your savings. Your options depend on your employer. When your employer launched the 401k, he decided whether he wanted employees to be able to take loans and early withdrawals. If your employer doesn't allow either, you won't be able to take your money out to buy a house (until you retire, that is).

    Loans

    If your plan allows loans, this is the best way to take your money out early because it avoids tax penalties. The amount you can borrow depends on how much you have in your account. If you have over $100,000, you can borrow up to $50,000. If you have less than $100,000, you can borrow up to half your account balance. You need to repay this loan back with interest to your account. Since you are borrowing the money to buy a house, you have up to 15 years to repay the loan.

    Hardship Withdrawals

    You can also use a hardship withdrawal to take money out of your 401(k). To take a hardship withdrawal, you need to prove a immediate and heavy financial need, according to the IRS. The IRS lists that buying a house meets this definition so you can take a hardship withdrawal. When you take out withdrawal, you'll owe income tax on the entire amount. If you are younger than 59 1/2, you'll also owe an extra 10 percent penalty.

    Rollovers

    If you quit your job, you have one more option to take out your 401(k) money. You are allowed to move your 401(k) into another account through a rollover. Depending on your company, you might be able to transfer this money directly into your bank account. If you keep the money in your bank, you'll owe income tax and the 10 percent penalty on the entire amount. You can also move the money into an IRA. The IRA lets you take out up to $10,000 to buy your first home. There is no penalty on this withdrawal, but you'll still owe income tax on the withdrawal.

    About the Author

    David Rodeck has been writing professionally since 2011. He specializes in insurance, investment management and retirement planning for various websites. He graduated with a Bachelor of Science in economics from McGill University.

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