Using 401k for Down Payment

[Lorenzo Prieto]

Hello, 

I'm looking use my 401k to fund 3-5 percent down on my first house hack. I think realistically it would take me about a year or two to save enough money for a down payment and I'm eager to get in the real estate this year. My biggest question is if this is a smart thing to do. I am not close to retirement age now and would like to think that by starting as soon as I can in real estate I will be better set up for retirement later down the line through real estate investing. I've done some research and understand the penalties associated with withdrawing from a 401k. Is there anything that I should watch out for or think about deeper before making a final decision? 

Thank you! 

[Jake Wiley]

Before looking into a straight withdrawal, you could consider a hardship loan from your 401k instead.    Here's a link that explains it, but could be a viable option and a home purchase is one of the allowable reasons.   

This way, you could pay it back without the penalties and the reduction in 401k principal.   

One thing to note if you change employers while the money is out it will generally turn into a withdrawal.   

[Lorenzo Prieto]

Great information! Thank you Jake! 

[Randy Rodenhouse]

With a 401K loan, you can pull up to $50,000 or 50% of the 401K value with no penalties. You do have to pay it back with interest at a certain percent over a specified period of time. The interest is paid directly back into your 401(k) account and not paying interest to a third party since you are essentially loaning yourself money. Typically, you must repay a plan loan within five years and must make payments at least quarterly. The law provides an exception to the 5-year requirement if the employee uses the loan to purchase a primary residence.