Securing a down payment is usually the biggest hurdle for most people when it comes to buying a home or upgrading their current home.
To help ease the burden of saving up a down payment, you can consider borrowing from retirement funds – 401k and IRA.
Borrowing Against 401k for Down Payment
How Much Can you borrow From you 401k?
You can borrow 50% of your vested balance or $50,000 whichever is lower. (generally speaking, every 401k is different, check with you CPA.
How Do I Pay It Back?
Generally, the repayment period is usually between 5 and 15 years. Your payment includes interest is deducted directly from the paycheck and put back into your 401k account.
Read and know the terms of your 401k carefully as some plans may require you to pay off the remaining balance in a lump sum if you leave that employer or company.
Since you are borrowing from yourself, the payment is not considered a debt and not included in the debt-to-income ratio calculations for mortgage qualification. (ßThis is key)
What Are The Tax Implications of Borrowing from 401k?
It should be reminded that borrowing from 401k and withdrawing have different tax implications. You can borrow up to 50% of the vested balance (or $50,000 whichever is lower) with no tax implications. Once again, it is our advice to advise a Certified Public Accountant
Each 401k brokerage has different fees and rules, some charge a 10% fee on all withdrawals, research before you make any major moves.
How Much Can I Borrow From IRA and What Are The Tax Implications?
From Roth IRA you can withdraw contributions any time with no tax implications. After you have held the account for 5 years, you can withdraw an additional $10,000 from the earnings with no penalty or taxes.
From Traditional or SIMPLE IRA, you can take out $10,000 with no penalty. And if you are married, your spouse can withdraw another $10,000. That could mean a total of $20,000 contribution towards down payment with no penalty or taxes.
Disclaimer – We are direct lenders, and are not certified public accountants or tax advisors. This blog is to help you learn about options and guide you to the right people.