IndyStar.com Business
August 13, 2006
THIS WEEK'S FOCUS:
Should I make an early 401(k) withdrawal to buy a house?
Early 401(k) withdrawals can have significant tax consequences. But opinions vary on whether the consequences should prevent you from dipping into those funds for a down payment on a house. Here are the conflicting opinions of members of the Financial Planning Association of Greater Indiana.
Alice Bryan NORTH STAR FINANCIAL CONSULTING Buying a home can be an emotionally as well as financially rewarding step. And therein lies the problem. We tend to make decisions based less on logic when the emotional stakes are high. While there may be some emergency situations in which borrowing from a 401(k) may be appropriate, as a rule such loans will serve only to reduce the balance that would have been available in the plan at retirement had the loan not been taken. The loss compounding on the loaned dollars while they remain out of the 401(k) account takes its toll. To add to that woe, normal 401(k) contributions frequently are reduced while that loan is being repaid. Those lost savings dollars also reduce the available funds at retirement. In spite of the qualified withdrawal that is now allowed for first-time home purchases (limited to $10,000 lifetime maximum), which enables you to avoid the 10 percent early- withdrawal penalty prior to age 591/2, you need to remember that short-sighted decisions can have painful long-term consequences. You can find alternatives to borrowing funds for a home purchase, but you can't borrow to fund your retirement years. Your best bet is to sit down with a qualified professional, step back and look at the "big picture" to identify all your options, and take the emotion out of the process as much as possible. Much of life is about having options and making choices. Be sure you're making the right ones.