Should You Take Money Out of Your 401(k) To Purchase a New Home?
Are you an early retiree who is ready to move? Many early retirees looking to move find themselves asking the same question: Should I take money out of my 401k to fund my new home? The truth is that in almost all cases, drawing from your retirement, or 401(k), account is not a good idea. Saving money through a 401(k) provides opportunities for tax breaks and employer contributions, but requires discipline to avoid the heavy penalties associated with withdrawing money early – even for investment purposes, like purchasing a new home.
If you use money from your 401(k) account before you turn 59.5, the government requires you pay a ten percent (10%) penalty for early withdrawal. That penalty is in addition to income taxes that are owed on the total amount withdrawn from the account.
An example of the weight of these penalties can be seen using a couple in the 25-percent-tax-bracket who want to withdraw $10,000 early to help pay for closing costs. This couple will have to pay a total of $3,500 in penalties and taxes in order to withdraw that money. This can create a problem for early retirees who want to move into a home that is closer to family and friends, or into what they will consider their forever property. It can be difficult to abstain from pulling funds from your retirement savings to secure that property that you may have spent years dreaming about, but it’s important to consider the consequences of an early withdrawal.
Early Retirees Waiting to Turn 59.5
For individuals looking to purchase a move-up property, but are not yet 59 ½ and do not want to face the penalties associated with tapping into retirement accounts, a bridge loan may be a good way to finance the purchase of your new home. This option can help early retirees who are two years or less from qualifying for retirement withdrawals to move while their dream home is still on the market, or when moving closer to family, medical care, or assistance cannot wait any longer. In this case, an early retiree would use a short-term bridge loan to cover the period before they qualify for retirement withdrawals. They would then pay off that bridge loan after the penalty-period has passed – effectively saving the difference between the 10% early withdrawal penalty and the cost of the bridge loan.
Moving Before Your Current Home Sells
Life often works out of order and sometimes moving is necessary for medical or family reasons that cannot wait on the sale and closing process of your current home. Hurst Lending created the Retired Mortgage Bridge Loan program to let you use the home equity in your current home to move where you need to, regardless of a fixed income. This option creates a new, first lien bridge loan on a new home in the right location that is paid off when your old home sells. Using the “credit” you built in the form of your current home’s equity to secure a bridge loan allows you to forgo pulling money out of your retirement accounts and secure the property you want, when you want it.
Retirement accounts are a powerful financial tool and while their balance can be tempting to those who have not yet reached the retirement age, the true costs of early withdrawals after taxes and penalties are taken into account rarely make touching that money before the age of 59.5 a wise financial decision. To talk with a Bridge Loan expert about your unique circumstances and understand what is the best next step for you, contact us now or call (877) 405-3465.
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