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Can I Use a 401k to Buy a House

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					                      Can I Use a 401k to Buy a House?


After contributing money to a 401k plan over many years, some people have a large
amount of money inside of a 401k account. These accounts can be a desirable source of
funds for purchasing a home. However, there are rules and restrictions on withdrawals
from a 401k account. Fortunately, there may still be a way for some people to use the
money in their 401k.

Some 401k plans allow participants to take a loan against the funds within the 401k.
Typically, the plan will limit the amount of the loan to a certain percentage of the total
account balance. The means that you can't borrow all of the money in your plan, just
some of it. However, this amount may still be significant enough to be useful for your
long-term goals.

When you borrow money from a 401k plan, you borrow the money from yourself. In
other words, the funds are withdrawn from your account and distributed to you. That
means there is no credit check and your credit score has no impact on your loan interest
rate, because there is no risk to any creditor. You are paying back yourself. In fact, the
interest you pay on the loan goes directly into your own 401k account, not to any bank or
lender.

However, this doesn't mean you can control how and when you repay the loan. The IRS
has requirements that must be met regarding 401k loans. As such, the plan will have a set
interest rate that you must pay when you repay the loan. In addition, you must make
timely, regular payments, just like any other loan. Typically, most 401k plans require that
you make regular monthly payments in order to fulfill this requirement.

It is important that you make your 401k plan loan payments. While there are no creditors
involved, and therefore there is no damage to your credit rating or credit report, there can
be substantial tax repercussions for failing to repay the loan as agreed. Any loan principal
that is not repaid is considered a distribution by the IRS. That means that the full amount
of any unpaid loan balance is taxable as ordinary income. Even worse, if you are under
age 59 1/2, then the distribution will be considered an early distribution and may be
subject to a 10 percent tax penalty.

The benefits of using a 401k plan loan to buy a house are very advantageous to most
people. However, it is important to understand that even though it is a loan to yourself, it
is still a real loan, and it must be repaid. If you can do that, then borrowing from your
401k may be a smart way to finance your home purchase.

				
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posted:5/29/2012
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