Online, I see a lot of different viewpoints on the soundness of dipping into my 401k to purchase my first home. I would like to hear what the Marketplace Money opinions are on this action given my specific economic situation.
I am a 29 year old male 1 year out of business school. I have a solid job as a trading analyst on an electric trading floor for the major utility here in CO. I make a base salary of ~80k a year with an option to land another 7-10k in bonus season if its a good year for the company. Last year, I was especially lucky and was given an additional bonus that allowed me pay off all my student debt, which was roughly $15k. So with no outstanding long-term debt, I am debating on purchasing a house for the first time. I have $5k tucked away in a money market fund that is earning zilch but I am using that as my emergency fund so dont want to touch it. Other than that I have roughly $3k in savings rights now and accumulate about $1500 in savings each month after accounting for my rent and living expenses. the denver real estate market is a little bonkers right now but i think it will cool down in 6 to 12 months and want to be ready to strike when opportunities presents itself. To throw another wrench in the equation my sister wants to go in on this as well with me. She has roughly $20k tucked away and is already a home owner. To make things more complicated, I am in the middle of the CFA program and would be looking at the high possibility of relocating in 2-3 years if I were to land a job promotion at another firm. So I dont know if it would be best to sell the property, hold on to it and rent it out while living out of state, or just not buying in the first place. Not sure on what all the tax implications are w/ and w/out the 401k loan thrown into the mix. Any thoughts?
Paddy Hirsch Jun 15, 2013 Senior Editor, Marketplace
Nice job paying down your student loan! And good luck with the house hunt. I see from Redfin that the median listing price in Denver is $329,000. A 20% deposit on that would be nearly $66,000. So if you have just $5000 in savings (i'm assuming the other $300 in in the 401(k)), I can see why you're looking at getting some help from your sister.
I can also see why you mght be thinking about raiding your 401(k). But I'd advise against it. Certainly every personal finance advisor, CPA and enrolled agent we talk to would tell you to leave that money alone. I'm surprised to hear you're getting mixed opinions on raiding your 401 (k). It's pretty universally considered unwise because of the tax implications. If you withdraw any money from the account before you're 59 and a half, you'll pay a hefty penalty.
You went to business school, so think about it from a return on investment perspective. If you raid your 401(k), the money suffers an immediate 10% loss. If you put it into your home, your home will need to appreciate by 10% for you to break even on that sum. And although the market is rising right now, you'd have along way to go before you broke even on that investment, let alone made any kind of return.
So, my advice to you would be to stay put for now, sock away your cash and when you've got enough for a deposit, go for it. But don't ding your retirement!