Should You Tap Your 401(k) to Buy a Home? The Home Savings Act Explained.
The Home Savings Act was introduced by Congressman John McGuire which will allow people to access their 401k to use for down payment and/or closing costs to buy a home without penalties.
Now, this is not something completely new, with most 401k plans you can borrow from it to use towards closing costs and down payment when buying a home. However, you can be taxed as if it’s income, and it turns into a loan with interest that you pay back to your 401k. Which in the grand scheme of things, paying it back doesn’t really hurt you unless you can’t afford the payment. I believe that it’s an automatic paycheck deduction. You usually have to pay it back within 5 years, but some allow a longer term. It can also be treated as income and you would be taxed on it, plus have a withdraw penalty. Oh, the other negative is if you lose your job, you must pay the balance back in full. That can be tough, so make sure you’re prepared for that.
With the Home Saving Act you can withdraw it, gift it to a family member, let’s say your kiddo, when you do that there is not a gift tax on it as long as they use it for down payment and closing costs. It’s not treated as income, so no tax on that amount. It’s a withdraw, not a loan, so you do not need to pay it back.
There is a termination date of December 31 2030, so after that date, the 401k penalties and loan requirements go back in affect.
I think this is a good thing for the most part, because it would save you a higher interest rate using down payment assistance. Of course this is dipping into a retirement opportunity, but if you go into this with open eyes, it can be a smart move.
What do you think?
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I’m Pam Graham, a Northeast Florida real estate consultant, which includes Jacksonville, Clay & St John’s Counties. I break down the market in layman’s terms so you can make smart decisions—whether you’re buying, selling, or just keeping an eye on what’s happening.
Call/Text 904-910-3516
Email: pam@pamgraham.com
