Using 401K to fund first-time home purchase...

[ea1776]

Is it possible to use 401(k) funds for a first-time home purchase, without penalties?

I realize you would have to pay income taxes on the money, since it's pretax contributed.

Is there a limit on how much can be taken out for this purpose?

Disclaimer: I realize that this is probably frowned upon by the investment community, but I think it's a good idea for my situation.

[Broken Arrow]

Short answer: No.

From the horse's mouth, unless you are already 59.5 years old, here are the only exceptions to avoid the early withdraw penalty.

* Made to a beneficiary (or to the estate of the participant) on or after the death of the participant,
* Made because the participant has a qualifying disability,
* Made as part of a series of substantially equal periodic payments beginning after separation from service and made at least annually for the life or life expectancy of the participant or the joint lives or life expectancies of the participant and his or her designated beneficiary. (The payments under this exception, except in the case of death or disability, must continue for at least 5 years or until the employee reaches age 59½, whichever is the longer period.),
* Made to a participant after separation from service if the separation occurred during or after the calendar year in which the participant reached age 55,
* Made to an alternate payee under a qualified domestic relations order (QDRO),
* Made to a participant for medical care up to the amount allowable as a medical expense deduction (determined without regard to whether the participant itemizes deductions),
* Timely made to reduce excess contributions,
* Timely made to reduce excess employee or matching employer contributions,
* Timely made to reduce excess elective deferrals, or
* Made because of an IRS levy on the plan.
* Made on account of certain disasters for which IRS relief has been granted.

You'd be much better off taking out a 401k loan. Again, from the IRS' website:

Generally, if permitted by your plan, you may borrow up to 50% of your vested account balance up to a maximum of $50,000. The loan must be repaid within 5 years, unless the loan is used to buy your main home.

I don't know if what you have in mind is an investment property, but if this is not for your main home, please keep in mind you'll have to pay it back in 5 years.

How ever you cut this, chances are good that this is most likely not a good idea.

[sweeps]

In theory yes, but it's not practical. Check your 401k plan documents for the rules. In my plan, it must be a "primary home purchase" and you must show "extreme immediate financial need". Then, even if you are granted the withdrawal, you are penalized by being banned from making any new contributions to your 401k for 6 months.

In other words -- find the money elsewhere.

[disneysteve]

Originally Posted by Broken Arrow

How ever you cut this, chances are good that this is most likely not a good idea.

Originally Posted by sweeps

In other words -- find the money elsewhere.

It is a bad idea to raid your retirement account for pretty much anything but retirement. I might make an exception for some catastrophe - better to raid the 401k than to file bankruptcy - but buying a home certainly isn't a catastrophe. It also isn't an emergency. If you don't have the money for a down payment, don't buy yet. Save up until you do have the 20%. If you need to stop 401k contributions for a while in order to save up for the house, do that. Just don't take out what you've already put in.

[tripods68]

When i left my last job i transferred my 401K into an IRA. Then I use the first 10K of it towards down payment as First Time homebuyer without incurring any penalty.


But if you are still working, taking out the money out of 401K plan is little to be desire due to tax penalty and the money you took out must be repaid with interest.