Hello Mike, I concur that the 401(k) loan is probably the better of the options. Check with HR before you get too far ahead of yourself, though, because every plan document is different and your 401(k) may or may not allow loans. Also, beware that you probably will not be able to borrow more than 50% of the current balance in your account. Good luck getting that house! Dick Friend
It is not a very good place to get money to buy a home.
For some strange reason, the IRS allows first time homebuyers to withdraw up to $10,000 without penalty - but this exception does not apply to qualified plans such as your 401k. This means you can't take money out of your 401k without paying both income tax and 10% penalty.
If the 401k is from a previous employer, you can roll the money into an IRA, then take a withdrawal - but you will need to pay tax at your marginal income tax rate. (and the withdrawal will increase your income - which could raise your tax rate!)
You can borrow money from your 401k (if your plan allows it) - but you need to be very careful with 401k loans. There are many reasons I do not like borrowing 401k money for home purchase:
1.) you are already borrowing a lot of money for your mortgage. 401k loans need to be paid back within 5 years (plans may allow 10 years for a home purchase) - so the payments are quite meaty. Can you really afford to repay your 401k loan and still meet your new housing payment?
2.) If you lose your job (or leave for another opportunity) your loan must be repaid in full, otherwise it becomes an early distribution subject to taxes and penalties. Just what you need if you lose your job - a huge tax bill!
3.) Retirement savings is for retirement, and should be used exclusively for retirement. (this is my opinion)
You can withdraw up to 10,000 from a 401k or an IRA and not be subject to the 10% penalty for an early distribution if you are purchasing a home , however you would be subject to ordinary income tax on that withdrawal .
You may want to consider taking out a loan from your 401k instead of withdrawing the money. I like a loan better because you are forced to pay the money back into the 401k . You can borrow the money up to 30 years if it is for a primary residence, and the interest rate is very low.
Mike - it is important to note that if you want the $10,000 exemption you must roll the money from your 401k plan TO an IRA and then take it out...no home-purchase exemption applies to 401k withdrawals.
Regarding a loan...first of all, not all plans allow for loans. Check with your benefits department or HR and they can give you the info about your particular plan.