Brian, Congratulations on your new baby. It is always exciting to have a new little person in the household.
Regarding your question. You’ve hit a hot button, so please excuse me if I sound a bit harsh. You indirectly answered your own question when you stated the ‘money is just sitting in an account’. That is the purpose of a retirement accounts! The purpose of the account is for you to invest and grow your assets, tax deferred, for your retirement. They are not savings accounts for your near term needs or goals. In today’s world, you have the responsibility of saving and investing for your own retirement.
If you take the money out now, you will need to save an even greater portion of your income later. The money should be left intact to take advantage of compound growth. Far too many Americans reaching the 40’s, 50’s and 60’s are discovering they didn’t save enough (or anything) for their retirement. To catch up, they will need to save half or more of their paycheck – are you prepared to do that? The other alternative is to work into your 70s or later.
Regarding taking funds out as a 401k loan. Be aware that with most plans, if you leave the employer or are laid off, the loan is due, in full. The question to ask yourself is whether your job is stable and if you would have funds available to pay back the full loan.
As with any young family, it sounds like you have lots of moving parts to your financial situation. It might be worth your time to sit down with a fee-only financial planner to get a few hours of consultation. The planner can put all the pieces of your financial puzzle together into a comprehensive picture. They can also help you put together an asset allocation of investments for your retirement accounts so they can start to grow.
You can find such a planner at Garrett Planning Network. Always choose find someone whose fiduciary responsibility is to you. This means they must act in your best interest above all others, including their own. You should ask them to put it in writing.
Hope this helps,
Andy Tilp, CFP ® Trillium Valley Financial Planning, LLC
Congratulations, Brian. Andy could have simply answered your question and said "No, you would not have to pay back the money withdrawn for a new FIRST home (although the withdrawal would be subject to ordinary income taxes). Instead, he gave you some good advice and some tough love, which is what a good financial advisor will always do. I would second his advice to avoid taking money from your 401K and to invest the money inside your 401K more appropriately and effectively.
Hi Brian! Before taking any money out of your retirement account, ask yourself if you really NEED a new home, or if you just WANT one. I love something new and especially love moving since it is a project, but sometimes our wants get in the way of our needs in this area. A new baby brings new expenses on its own (dance classes, college, etc) and adding a new mortgage on top is sometimes too much. I have two kids and would downsize my house if my husband would let me - more space isn't always better. Rich and Andy are on point, so keep savings for your long term NEED - retirement.
Hi Brian, again Congratulations on the baby! All of the answers above are great - and I agree with all of them - especially the advice to work with a qualified individual who will work with you to build a sound financial future. In the event the only way to do what you want to do with regard to buying the house is via a 401k loan, please call your plan administrator to see if there is a provision in your employer's plan for 1st time home buyers. If there is, you may be able to have a longer payment period than a general loan. However, be aware that the if you lose your job, the loan will become due and you will have to get alternative financing to pay off the loan or pay tax and penalty on the amount if you cannot get alternative financing - hence take heart to the answers above to let your 401k money do its job for the future. Best wishes and good luck to you and your family.
Congratulations on the new baby. First of all, explore other options for obtaining a loan. Your 401(k) plan is designed for your future and financial needs at retirement. Secondly, you need to check with your employer to make sure your plan allows for loans, the terms and fees associated with taking a loan. When you borrow from your 401(k) plan, you pay interest to yourself and repay the loan through salary deferral. The rate is typically one or two percentage points above the prime rate, which is currently 3.25%, and you can usually borrow up to half of your vested balance, or a maximum of $50,000. Most loans must be repaid within five years, although some employers will give you up to 15 years if the money is used to buy a home. Your summary plan description should outline this information for you.
People don't realize they're paying the money back with after-tax dollars, and ultimately those dollars will be taxed [again] when they take out a 401(k) distribution. If you lose your job or leave before you've finished repaying the loan, you could pay even more in penalties. Also note that unlike a mortgage, you cannot deduct the interest on a 401(k) loan. Think twice. If you fail to repay the loan, it will be treated as if you made a taxable withdrawal from your plan. You'll have to pay income taxes on the balance, plus a 10% early-withdrawal penalty if you're under 591?2. Likewise, if you're laid off or fired from your job or you quit, you generally have just 60 to 90 days to pay off the outstanding loan. Otherwise, the balance will be taxed, and you'll owe a 10% early-withdrawal penalty if you're under 59 1/2 when you leave your job. Work with a financial professional to determine the best options for your particular situation.
Disclosure: The posted information is for informational purposes only. This message does not constitute an offer to sell or a solicitation of an offer to buy any security. All opinions and estimates constitute Karp Capital's judgment as of the date of the report and are subject to change without notice. Accordingly, no representation or warranty, expressed or otherwise, is made to, and no reliance should be placed on, the fairness, accuracy, completeness or timeliness of the information contained herein. Securities offered through Financial Telesis Inc., member SIPC/FINRA. Financial Telesis Inc. and Karp Capital Management are not affiliated companies.