Some young retirement savers say they might raid their 401(k) accounts to buy a home. But doing so could be to their detriment, experts warn.
According to BMO Financial Group’s Real Financial Progress Index, nearly one-third (30%) of aspiring homeowners say they plan to withdraw money from their 401(k) plan to fund the purchase. ing. BMO surveyed 2,505 U.S. adults this spring.
According to the BMO survey, millennials and Gen Z are more likely than older generations to say they will withdraw money from their 401(k)s, at 31% and 34%, respectively. By comparison, only 25% of Gen X homebuyers and 16% of baby boomers plan to withdraw money from their retirement savings to buy a home.
“You really, really, really shouldn’t be spending your retirement money on housing,” says Stacey Francis, a certified financial planner and president and CEO of Francis Financial in New York City. ” he said.
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Generally, early withdrawals from retirement accounts can be subject to taxes and a 10% penalty unless the account owner meets the exceptions listed. For both individual retirement accounts and 401(k)s, qualified first-time homebuyers may be eligible to receive up to $10,000 without penalty. A Roth IRA allows owners to withdraw after-tax contributions at any time without penalty.
Still, “it’s much better to have that money work for you,” says Francis, who is a member of the CNBC Financial Advisor Council.
Experts say 401(k) loans may be a better option for paying for a home, but they come with their own financial risks.
“Significant economic impact” of withdrawals
More savers tapped into their retirement savings last year, which experts say is a sign that some households are facing financial hardship. In 2023, 3.6% of savers will use withdrawals in difficult circumstances, up from 2.8% in 2022, according to Vanguard’s “How America Saves 2024” preview.
But Tom Parrish, head of lending at BMO, said withdrawing from a 401(k) plan could have “significant financial consequences.” Early withdrawals not only put a strain on retirement funds, he said, but also often come with associated penalties and taxes.
“There’s a reason these accounts have limits. It’s to your advantage,” says Clifford Cornell, a certified financial planner and associate financial advisor at Born Fied Wealth in New York.
For example, if a 30-year-old worker leaves a 401(k) with $10,000 instead of withdrawing it, he or she will have nearly $77,000 more toward retirement at age 65, assuming an average annual rate of return of 6%. There is a possibility that
The Pros and Cons of 401(k) Loans
Experts say taking out a loan against your 401(k) is generally a bad idea, but for a down payment or part of the cost of buying a home, it can be a more acceptable option than a withdrawal. There is.
Federal law allows workers to borrow up to 50% of their 401(k) account balance or $50,000, whichever is less, without penalty, as long as they pay it back within five years.
“The important thing is to make sure you pay it back over that period of time,” Parrish said.
However, if you leave the company, whether you are fired or find a new job, most employers will require you to repay your outstanding balance sooner.
Another risk is overspending on your home budget. Francis said buying a home requires a long-term, serious commitment. Buyers must not only cover the down payment, relocation costs, and closing costs, but also consider ongoing payments such as the mortgage, real estate taxes, and maintenance fees.
“It’s going to be very expensive for you,” she said. “If a little domino falls in the wrong direction,” Francis said, you could end up not being able to pay your 401(k) loan or your mortgage, putting you in a “really deep financial hole.”
