Given the gains workers have seen in their retirement plans
and in home prices in recent years, it makes sense that they would consider
tapping their 401(k) accounts to buy homes. And that is exactly what a growing
number of workplace savers are doing, according to a new study from Fidelity
The investment firm said workers who borrowed from their
401(k)s for home purchases tended to borrow more - $23,500 on average - and
could be putting themselves at risk of reducing or stopping their retirement
To be sure, cash-poor workers who borrow to the max to buy a
house can get into trouble quickly if they don't have the reserves to handle
emergencies. And a worker who borrows from his 401(k) and then leaves his job
usually has to pay back the loan within a few weeks or face a big tax hit as he
is forced to treat the loan as a distribution.
A well-timed loan from a 401(k) plan may help a home buyer
qualify for a better mortgage and cut monthly housing costs. Here are some
WHEN TO DO IT
Ironically, the best time to borrow against your 401(k) to
pay closing costs or cover a down payment is when you can well afford to.
Otherwise, you are stretching yourself to the point where you couldn't weather
If you lose your job and couldn't repay the 401(k) loan, you
would have to take that amount as a distribution. That would cost you income
tax and a 10 percent penalty on the amount and it would also leave your
retirement plan permanently lighter, as you wouldn't be able to replace that
money when you got onto more solid ground.
WHAT WORKS BEST
At the margin, a 401(k) loan could reduce your monthly costs
for years to come. Mortgage borrowers who put less than 20 percent down are
required to buy mortgage insurance, and that's not cheap.
A family with excellent credit putting $20,000 down on a
$400,000 home would be expected to pay an extra $184 a month for that
insurance, reports HSH.com, a mortgage research firm. Furthermore, a mortgage
lender might not qualify you for a loan if you had to borrow the down payment
from a parent or someone else, but would if you were just borrowing from
The math always wins. Some workers closer to retirement
might find themselves retirement-plan heavy with their eyes on a retirement
home. To buy it, they might have to sell investments and eat a sizeable capital
gains tax. Or a younger worker who has made a lot on stock funds in their
401(k) in recent years might want to temporarily tap that money to establish themselves
as a homeowner.
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