Many young retirement savers are considering raiding their 401(k) accounts to buy a home. A recent survey conducted by BMO Financial Group found that nearly one-third of aspiring homeowners are planning to withdraw funds from their 401(k) plans to fund a purchase. Interestingly, millennials and Gen Zers are more likely to do so compared to older generations, with 31% and 34% respectively stating their intentions.
Experts Warn Against It
Financial experts caution against this decision, emphasizing the long-term consequences. Stacy Francis, a certified financial planner, strongly advises against taking out retirement funds for a house purchase. Early withdrawals from retirement accounts can result in taxes and a 10% penalty, unless specific exceptions are met. While some accounts allow penalty-free withdrawals for first-time homebuyers, experts stress the importance of having those dollars continue to work for the individual.
Financial Risks of Borrowing Against 401(k)
While some individuals may consider taking out a loan against their 401(k) for necessary payments towards a home purchase, experts highlight the financial risks associated with this decision. Data from Vanguard’s How America Saves 2024 preview shows an increase in savers tapping into their retirement savings due to financial distress. Tom Parrish, head of lending at BMO, emphasizes the significant financial consequences of making early withdrawals from a 401(k) account.
Cost of Early Withdrawals
Certified financial planner Clifford Cornell provides an example of how leaving $10,000 in a 401(k) instead of withdrawing it can result in significant growth over time. He illustrates that a 30-year-old worker could potentially end up with nearly $77,000 more for retirement at age 65, assuming an average annual return of 6%. Experts stress the limitations placed on retirement accounts for the benefit of the account holder.
While experts generally discourage taking out a loan against a 401(k), federal law permits borrowers to access up to 50% of their account balance or $50,000, whichever is less, without penalty. However, it is crucial to repay the loan within five years to avoid penalties. The risks associated with leaving the company are also highlighted, as employers typically require repayment of the outstanding balance if the individual is laid off or finds a new job.
Financial experts emphasize the real commitments and ongoing payments that come with purchasing a home. In addition to the down payment, moving and closing costs, buyers must also account for mortgage payments, real estate taxes, and maintenance costs. Stacy Francis warns that overstretching on the home budget can have severe financial consequences, putting individuals in a deep financial hole if unable to meet loan or mortgage payments.
Overall, it is crucial for young retirement savers to carefully consider the long-term implications of raiding their 401(k) accounts for a home purchase. Financial experts stress the importance of maintaining retirement funds for their intended purpose and avoiding unnecessary risks that could jeopardize financial security in the future.
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