As downpayment requirements increase, anecdotally, home buyers are tapping 401(k) plans for extra cash.
But just because you can get access to your retirement money doesn’t mean that you should. 401(k) withdrawals should only be made after careful consideration.
There are some serious negatives, specifically with respect to taxation.
If you open a 401(k) loan and don’t repay according to the loan terms, the withdrawal ends up getting taxed as income, plus a 10 percent penalty for people under 59 1/2.
That’s a stiff penalty.
But, even if you do repay the loan on time, you’re still getting leaving yourself subject to double-taxation.
Furthermore, when you borrow against a 401(k), you assume the opportunity costs of having that money out of the market. Since March, the Dow Jones Industrial Average is up 44 percent. If your 401(k) was empty, you’d have missed those gains forever.
Taking a loan against a 401(k) isn’t necessarily a bad idea, there just may be better choices. If you’re planning to withdraw from your 401(k) to make a downpayment on a home, talk with a qualified financial professional first.
You can never have too much good information.