OH NO: 401k Money for a House Downpayment? NO NO NO - YouTube

Speaker 1: We have a voicemail number and  that number is two one nine two. David P.  

Here is a caller with a financial question  trying to safeguard their friend. Let's take  

a listen to this and then we'll talk about it. Speaker 5: Hi, David. This is Andy from Milwaukee.  

I have a friend, 34 and is from. He's been in  America two years and wants to save for a house.  

Beautiful. His idea was to put  all kinds of money in his 401k.  

And when he had enough, take it out  and use that money. And something  

I tried to explain to him, that's a bad idea  because he would pay a lot in taxes and penalty.  

I'm wondering, other than a standard savings  account, would you recommend something else? 

Speaker 1: So listen, your instincts are  completely correct. This is not a financial  

advice show. Every everybody's individual  situation should be reviewed with a financial  

adviser you trust, ideally a fee only financial  adviser. But I do have some background in this. I  

do have a master's degree in financial planning.  And so here's my thought on using a 401k for a  

down payment. There's a lot of reasons not to do  it. You will owe income tax on the withdrawal. You  

may even if it puts you into the next tax bracket,  you may even end up paying more tax on that than  

you pay on income. Remember the marginal tax rate?  If you're younger than fifty nine and a half,  

you will owe a 10 percent penalty on the  money that you withdraw. You can never repay  

the account. And so you lose years of tax free  earnings, which is the whole point of a 401k.  

So I would not go in that direction. There's also  the possibility of borrowing against the 401k.  

Now, there were some special provisions done  around covid on withdrawals I don't know about.  

I'm talking about in a non covid situation, you  can borrow up to fifty thousand dollars or half  

the value of the account, whichever is less from  your 401k if you are using it to purchase a house.  

But you've got to repay that loan usually  within five years. If you leave the job,  

you've got to repay it. There's a bunch of reasons  not to do it. So generally speaking, and this is  

not personalized advice, do not use time in the  market, right? Leave the money in the 401k if you  

want something better than a savings account for  saving for the down payment. In the short term,  

if you're talking about years, you could look  at extremely low cost index funds. Now there is  

risk with those the money they can lose value if  the market if you've got a four year time horizon  

before you want to do the down payment over  four years, the market could well lose value.  

But then you're avoiding a penalty and you  would just pay capital gains on the gains  

there. So not specifically tailored to  anybody, but I would be really hesitant  

to take money out of a 401k for a house down  payment. I would try to plan ahead and think about  

using a different vehicle, if that's the goal.  All right. Just I don't I don't know why people  

are even calling me with these questions, but I  feel comfortable talking about it. Always check  

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