You basically have 2 options to borrow against your 401k, if your employer allows either. The first option is for you to see if your employer allows for employees to take out loans against your 401k. This option will help you to avoid any early withdrawal penalties and from being required to pay taxes on your 401k money. This option is the most preferred option because you will repay the money back into the plan directly through a payroll deduction and you are permitted to put the money that you borrowed back into the account. You will pay interest on the loan, however the interest you will pay will be paid back to yourself. Keep in mind though that if you do take out a loan against your 401k that if your employment becomes terminated from your employer for whatever reason that any outstanding loan balance you still have against your 401k account will need to be paid back in full or the balance will be subject to being taxed as normal income and you will have to pay a 10% penalty if you are under age 59.5.

Option 2 for withdrawal is a hardship withdrawal. You have to meet certain criteria and guidelines to be eligible for a hardship withdrawal. Here are the guidelines for this type of withdrawal:

Financial hardship withdrawals can be obtained for the following reasons:

* To buy a primary residence (the most common reason folks take hardship withdrawals according to the Investment Company Institute)
* To prevent foreclosure or eviction from your home
* To pay college tuition for yourself or a dependent, provided the tuition is due within the next 12 months
* To pay unreimbursed medical expenses for you or your dependents

You may qualify for a penalty-free withdrawal if you meet at least one of the following exceptions:

* You become totally disabled.
* You are in debt for medical expenses that exceed 7.5 percent of your adjusted gross income.
* You are required by court order to give the money to your divorced spouse, a child, or a dependent.
* You are separated from service (through permanent layoff, termination, quitting or taking early retirement) in the year you turn 55, or later.
* You are separated from service and you have set up a payment schedule to withdraw money in substantially equal amounts over the course of your life expectancy. (Once you begin taking this kind of distribution you are required to continue for five years or until you reach age 59 1/2, whichever is longer.)

Keep in mind that you are not able to replace this money from your 401k once you have withdrawn it through a hardship withdrawal. You will be required to pay the necessary taxes on this money as though it was "normal income" earned for the year and if you are under the age of 59.5 you will pay a 10% early withdrawal penalty. Therefore, you can see why a 401k loan would be more beneficial for a variety of different reasons.

Withdrawing money from your 401k to make a house down payment or to pay closing costs is often an overlooked method of coming up with this necessary money when buying a home. While a 401k loan is most recommended over a 401k withdrawal, both can be very good ways to get the needed money to buy your first home and not lose out on the potential house of your dreams.

 

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