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Break the 401(k) piggy bank

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Question: With the incredible deals in Michigan Real Estate and the loss that I’ve already taken in my 401K, what do you think about buying our dream home with the money left in our 401K? Patrick, Livonia, MI

Answer: Forecasting is a hazardous business. But for now it seems that the beleaguered Michigan economy will stay under downward economic pressure.

I think you’re right that it’s becoming increasingly affordable for many people to own their “dream home” with the sharp decline in home prices and the fall in mortgage interest rates. But I don’t like the idea of raiding your 401(k) to buy that home.

You’re far from alone with “paper losses” in your retirement savings account. Nevertheless, the money in this account is a pool of savings that will gain in value over the years. It’s also a smart way to diversify savings outside the Michigan economy where you live and work. If you take the money out you will both lock in your losses and pay income taxes on the withdrawal and a 10% penalty. Taken altogether, it’s a bad financial deal.

I want you to own your dream house. I don’t see any reason to rush, however. The economy isn’t going to turn around anytime soon, and even if you miss the bottom in home prices it’s a good bet that prices will stay low for several years–at least. More important, one of the lessons of the past several years is to make sure you stay financially conservative when buying and owning a house. Another lesson is that a home is a long-term investment.

That’s why I would start shopping for your dream house. Run the numbers, and figure out what you can afford while leaving the retirement savings plan alone (and continuing to save for retirement.). Add to and build up your savings so you can put down a good-sized down-payment. Make sure your credit score is high so you qualify for the best mortgage interest rate. You’ll get that home, but with a healthier balance sheet than if you close out the 401(k). .

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