Companies offer 401k plans to their employees to help them save for retirement. The Internal Revenue Service permits account holders to access the funds in the event they are needed for purchasing a home.
Money can be removed from a 401k plan for a home down payment either through a 401k loan or an early withdrawal.
Early withdrawals can be taken only if the account holder has no other financial resources. For example, if a 401k plan loan would render the account holder ineligible for a mortgage, a hardship withdrawal can be taken instead.
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401k Loan Features
401k plan loans must be repaid with interest. Typically, 401k plan loans must be repaid within five years, but loans used for home down payments can be repaid over 10 years instead.
401k Withdrawal Features
The IRS requires all 401k withdrawals to be reported as taxable income. If the withdrawal comes before you reach 59 1/2 years old, you must also pay a 10 percent early withdrawal penalty on top of the income taxes.
401k plan loans cannot exceed $50,000 or 50 percent of the account value, whichever is smaller. 401k early withdrawals cannot exceed the amount of the down payment plus any applicable taxes and penalties.