One question we get frequently at CribRater, is should we rent or buy in New York. New York is a crazy market and the cost to buy is higher than every other city in the United States. There is a need to put 20% down which results in New Yorkers forking over north of $100K on 1 bedroom apartments. Should we use our 401K to cover the down payment?
Rent Or Buy Debate: Borrowing From Your 401K
With this kind of outlay, many New Yorkers must decide if they want to withdraw or borrow money form their 401K to put down that deposit. Here we look at the risks to help you make the decision.
You will find many threats to borrowing from a 401k before retirement. Understanding you will have to pay yourself back may give you satisfaction.
Fact: Saving for a deposit can be difficult. It is easy to get trapped in the exhilaration of apartment hunting. It is tempting to withdraw from your 401K.
You work hard for it and in the end, it is your money, you trust yourself to repay it, right? Not too quickly.
More facts: it is likely that you probably cannot afford the apartment to begin with. If you need to borrow against your 401k to manage to purchase the new apartment. You have to look and see where your cash is actually going and could you actually manage this? Will there be money to be saved out of your entertainment spending budget?
Early 401K Withdrawals Have Repercussions
We strongly recommend that if you have other resources that you choose to use those. Early withdrawals can add lots of fiscal pressure down the road. Nevertheless if the possibility of living beyond your means does not turn you off, there are numerous reasons not too. Taking out a 401k loan mightn’t make the most fiscal sense. Your future wealth can be compromised by a 401k loan. The loan that is typical, enables you to borrow up to a maximum of $50,000 and up to 50% of your balance. Here is a scenario. Say you need to take out the total $50,000, that was growing, cautiously, at 7% per annum.
According to some certified financial planners, if you borrow from your 401k in 20 years, at age 40 that cash would have developed to a massive $193, 000. Fast forwards at 60 to you, theoretically considerably closer to retirement, and you have taken a tremendous hit on your future financing. Not just that, but additionally the cash you had been using to pay yourself back all of these years was the same cash you must’ve been saving, making issues even worse for retirement.
Most advisors will tell you your 401k is not to be touched. It should only be used for retirement. In this scenario, it could be better preserve for the future and to keep renting. Remember you are taxed on early distributions and will be penalized for any early withdrawals. There are several scenarios the IRS considers “okay” with regards to borrowing out of your 401k plan before you hit 59.5 years old, but an apartment purchase is not one of them. You incur a ten percent additional fee on the early distribution, since the sum is taxable income, when you borrow from your 401.