Withdrawing from a 401(k) before age 59.5 triggers a 10% penalty plus income tax on the distribution.
The median U.S. home price reached $426K in September. That is 63% higher than a decade ago.
30-year mortgage rates now stand at 6.9% despite Federal Reserve rate cuts.
A recent study identified one single habit that doubled Americans’ retirement savings and moved retirement from dream, to reality. Read more here.
Owning your house free and clear is a goal all homeowners look forward to. Years, or most likely decades, of monthly mortgage payments is a burden most of us can’t wait to leave behind. With a mortgage typically consuming as much as one-third or more of a household’s income, writing that last check will be like a huge weight being lifted from your shoulders.
So what if you could make that monthly nut to crack magically disappear? That was the possibility facing a recent caller named Reuben to financial guru Dave Ramsey’s radio show.
Reuben told Ramsey he is looking to buy a house and has half the money for the purchase price saved up. What he wanted to know was, should he withdraw all the money from his wife’s 401(k) retirement plan to make up the difference and that way own his home outright?
Owning a home is part and parcel of the American Dream. It is an asset that (usually) appreciates in value and it gives you a sense of permanence, even if the bank holds the title. Yet it is becoming harder for the average person to participate in this storied way of life for millions.
The average sale price of a home in the U.S. is $500,000 as of the end of September, though the median price is marginally more affordable at $426,000, according to the U.S. Census Bureau. That’s 63% more than the median price just 10 years ago ($261,500) and more than double the price 20 years ago ($211,000). At that rate of inflation, the price of a new house could cost over $601,000 in another 10 years.
And even though mortgage rates were supposed to decline as the Federal Reserve began cutting interest rates, that hasn’t happened. A 30-year fixed rate mortgage now goes for 6.9%, an 800 basis points increase from where they stood in mid-September when the Fed made its first cut.
Withdrawing funds from a 401(k) plan to buy a house certainly sounds like a smart move. As inflation chugs higher, getting a house now before prices and rates move up — and then never having to worry about a mortgage payment again — seems like a savvy play.
Yet Ramsey cautions that your withdrawal will be subject to an automatic 10% penalty for taking out money before 59-1/2 years old and the money received will be counted towards your income. That means if you’re in a 25% tax bracket right now, you’re going to be socked with a huge tax bill on that 401(k) cash.