Here's How to Buy a Home with your 401(k)

You can use up to $10,000 of your 401(k) towards a down payment for a home purchase except there will be two issues

• There will be a 10% early withdrawal penalty

• You will have to pay income tax on what you withdrawal

For example, a homebuyer wants to purchase a home for $200,000 and they take $10,000 from their 401(k) to use towards the down payment.

• There will be $2,000 as a tax penalty and will boost you to the next income bracket which can lead to additional taxes.

Rollover 401K to an IRA

Luckily, there's an answer for the double taxation and that's rolling over your 401(k) plan to an Individual Retirement Account (IRA). A Traditional IRA is the most common type of account that allows you to save money for retirement on a tax deferred basis. If you qualify as a First time Homebuyer which means you did not own a home in the last 2 years, you will be able to withdrawal up to $10,000 lifetime. Here's what you need to know...

• You will avoid the 10% early withdrawal penalty

• You still will pay income tax from what you withdrawal

What Next?

Account holders will be able to rollover their old 401(k) plan to a new employer's plan but ALWAYS check and contact the employer for more information. A "DIRECT ROLLOVER" occurs when the 401K rolls over directly to an IRA and an "INDIRECT ROLLOVER" will hold 20% to pay taxes for your withdrawal until you deposit in an IRA within 60 days when you received the distribution. Then you'll avoid the 20% tax penalty. Take advantage and use your 401(k) to fund your down payment if you really need to complete the purchase.