By U.S. News
Filed under: Buying, Investing
You’ve found the perfect house in the cutest neighborhood. And you’re tired of writing a rent check every month, with nothing to show for it. All that’s keeping you from making an offer on your first home is that big down payment.
So is it OK to use your 401(k) account to buy your first home? Before making that decision, you need to decide if it makes more sense to keep your money in your 401(k)’s stocks and mutual funds, or if you’ll make more money in the long term by shifting that money to your primary residence.
Weighing Your Options
Real estate is just starting to recover after the bubble burst on prices during the Great Recession, but it’s a hot investment right now: The National Association of Realtors says the median price for existing single-family homes is $229,400 — up 8.2 percent from the previous year.
That outperforms nearly anything that you’d find in target-date funds that are included in many 401(k) plans; for instance, the Vanguard Target Retirement 2050 fund (ticker: VFIFX), for those who are planning to retire about 2050, has returns of 1 percent in the last year.
Of course, a one-year snapshot doesn’t tell the whole story. The markets are in a six-year bull run, but returns are lower this year because of August’s correction and concerns that the Federal Reserve will raise interest rates. Fidelity says its average 401(k) account dropped from $91,100 to $84,400 in the third quarter.
Robbing Peter to Pay Paul
It comes down to a decision, financial advisors say, between trying to increase your long-term investment portfolio through your home or through the stock market, mutual funds and bonds held in a 401(k).
Andrea Heuson, finance professor at the University of Miami, says a 401(k) is a better investment vehicle because investors can choose where to invest their money, and they have the ability to get to it quickly in an emergency.
“That is probably not a wise economic decision [to dip into your retirement] simply because, from an investment standpoint, a 401(k) gives you much more flexibility as an investor than a house does,” she says.
Taking money from your 401(k) also comes with a big penalty, unless you’ve turned 59 1/2. Investors can expect to pay tax of 10 percent, which means that money is already lost before the initial transaction. And by draining 401(k) accounts, buyers could also miss out on the magic of compounding interest.
“If it’s not one of the worst things you can do, it’s close,” says Chris Copley, a regional sales manager for TD Bank in Pennsylvania and New Jersey.
Copley says there is seldom a time where he would recommend that a client liquidate a 401(k) account. “That would be an occasion with special circumstances,” he says, adding that potential buyers should be able to put 3 percent down plus cover closing costs without dipping into their retirement accounts. If they don’t have …read more
From:: Buying and Selling