Should You Ever Borrow From a 401(k) for a Home Down Payment?

Should You Ever Borrow From a 401(k) for a Home Down Payment?

In our “Ask a CFP®” Q&A series, we cede the floor to a CFP® to address some of the trickiest money topics out there.

Today, Tom Gilmour, CFP®, a financial planner at LearnVest Planning Services, explains whether it's ever wise to pull money from a 401(k) in order to purchase a home.

Retirement and homeownership. As a financial planner, these are two of the most common savings goals for my clients.

The only problem? Juggling both can be tough.

Thanks to fewer pensions and shrinking Social Security, it’s increasingly falling on individuals to fund their own golden years through savings vehicles like 401(k)s — but homeownership can also be an important future investment.

And now that the spring home-buying season has arrived, many people will no doubt be wondering if it's ever a good idea to borrow from a 401(k) for a home down payment.

Why So Many People Ask This Question In my conversations with clients, this is often phrased as, "Can I take a loan from my 401(k), and pay it back later?"

Translation: Although most people realize they shouldn’t be dipping into their retirement account, they tend to view borrowing from a 401(k) as somewhat OK.

And I get it. A nest egg can feel like money that’s just sitting there — doing nothing — while homeownership is a more pressing goal.

What I Tell Them There are several reasons why I strongly caution against using 'tomorrow' money for today.

For starters, when you withdraw early from a 401(k), you're going to miss out on the benefits of compound growth.

There's also the fact that many companies have a 60-day repayment requirement in place. This means that if you take out a 401(k) loan, and then leave your employer, you'll only have 60 days to pay it all back.

That's a tough time frame to swing — especially if the money is tied up in a new house.

What's more, withdrawing from a 401(k) can become addictive. One Fidelity study of so-called 'serial borrowers' found that once you take out one loan, you're more likely to do it again — and again.

My advice? Don’t let homeownership aspirations drain your nest egg.

Instead, consider opening up a high-yield online savings account and nickname it 'Dream House.' Even though it'll take you longer to save up enough for a down payment, you'll be doing yourself a favor by not compromising your retirement well-being.

RELATED: Buying a House: How Much Can You Afford?

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.


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