At a certain point in your life, you start seeing most of your friends and colleagues having their own home. It may be tempting to join them right away and go out there to start looking at houses, but you also have to consider where the funds will be coming from.
If you’re planning to buy that gorgeous home down the block, then you will need to save 5 to 20% of the sale price. That’s a lot of money and it may take you a long time to save that much. Caught up in the excitement of buying a new house, you might be tempted to break into your 401k so you’ll have enough money for a down payment. You’re probably thinking, “What’s the harm? It’s my money, and I’m just borrowing from myself”. But the truth is that taking a cash 401 (k) withdrawal is a bad idea as it will cost you in the long run.
Generally, you can withdraw the money anytime you want and for any reasons, but be warned. You’ll be slapped with a 10% penalty on the amount you withdraw if you are under 59 ½. On top of that, any money you pull out of the 401 (k) plan will be subject to federal tax. This is because the government wants to discourage you from borrowing from you 401(k) plan before your retire.
Paying the 10% early withdrawal penalty is one of the dumbest things you can do for your personal finances. It’s like throwing your hard-earned money out the window. Plus, if you quit your job, you’ll be required to repay the loan immediately. That means you’re stuck at your current job as long as you have a loan.
If you can’t afford to pay the down payment, then you shouldn’t be thinking of buying a house in the first place. It is financially prudent to leave the money invested and save it for retirement.