As a freelancer in the US, you need to know a lot related to your retirement plan.
What is a 401(k) account?
401(k) account or 401(k) plan represents an employer-sponsored retirement account that allows workers to invest a portion of their pre-tax salary before taxes are taken out. 401(k) account funds are invested in stocks, bonds, mutual funds, and cash.
The main 401k facts are:
• The 401(k) account is a savings account used for the benefit of the retiring pensioners.
• The money in the saving account will grow without any tax deduction.
• You can withdraw money from the account before the limit has passed; however, there will be some deductions based on different factors.
• You can use your 401(k) account to get money for buying a house. However, it would help if you kept the monetary repercussions in mind.
The 401(k) account is an employee’s beneficial account to facilitate the working class. It is seen as more of a pensioner’s account that accumulates the earnings or the contribution of the pensions. The funding sometimes gets accumulated directly in the pensioner account, known as a 401(k) account. Many pensioners use this account to save up and use it for later purposes; however, there is never a hard and fast rule related to this account. In layman’s terms, the purpose of the report is to have more savings after retirement happens.
The benefit of having a 401(k) account is that the money is accumulated without any implications of tax applied on it. This means that no tax is deducted on the money which is saved in the account. Subsequently, the amount in the report also grows without any deduction of taxes. This is a plus point in having the store, and it doubles up your amount after some time, which is an added benefit to have while opening an account.
Newly added beneficiaries of the 401(k) account often ask the question as to whether they should buy a new house with the funds withdrawn from the 401(k) account. There are some pros and cons of getting money removed from the 401(k) account. Overall, we believe that it is not a wise move. However, it is permissible to withdraw some amount from the 401(k) account.
Can I use my 401k to buy a house?
Yes, you can use 401k to buy a house by withdrawing money from the 401k account or taking a loan from the account. A 401(k) loan is limited on how much you can borrow. Usually, you can borrow up to 50% of your vested balance, with a maximum loan amount of $50,000.
401k First time home buyer
First-time homebuyers can withdraw up to $10,000 from a 401k plan without incurring the 10% penalty. However, that $10,000 is still subject to state and federal income taxes.
Take out a 401(k) loan to buy a house – drawbacks
The major disadvantages of use 401k to buy a house or property are:
- Borrowing limits (usually 50% of your vested balance, maximum loan amount of $50,000. )
- Repay the loan within five years
- Lose an opportunity to save for retirement because you can only contribute up to the federal contribution limit.
- Some 401(k) plans require you to repay the entire loan if you lose or leave your job.
Cashing out 401k to buy house – drawbacks
- You can be hit with an early withdrawal penalty.
- You get less for your retirement.
We do not recommend making money from your 401(k) account to get a house in many cases. When left in the account, the amount can exponentially grow a lot rather than being taken out on which there are heavy taxes and penalties imposed.
Therefore, you should opt for the loan option or get the house option when it is completely unavoidable and necessary. You should take the hardship option if you fulfill the following two conditions:
• There should be a serious financial need
• The amount should be used to cover the financial need which arose.
There are many factors to consider when you are withdrawing money from the 401(k) account. Overall, the option to withdraw money should only be pursued when there is no other option left. It would help if you did not take the decision hastily, and it should only be done when there is a specific need for it. Otherwise, the savings and the growth applied to it will only go to waste, so there is a lot to think about here.
Firstly, you should speak with your employers through which you are getting this option available. Many employers do not allow the possibility of early withdrawal from the 401(k) account. On the other hand, some employers allow for the exit from the report. However, some penalties are imposed on it. You should therefore check the policy of the company and see whether they allow the withdrawal from the account or not. The best place to ask this would be the human resources department in your office.
Secondly, you should also understand that there are implications when you withdraw money from your 401(k) account earlier. There are some penalties imposed on you, and you may have to pay some amount. There can be some deductions made as well. It depends on the employers and their policy; however, as of 2021, the deductions made were around 10%. Another factor is imposed when you are speaking of deductions, and that is the age factor. As of the year 2021, anyone under the age of fifty-nine and a half (59 ½) and is attempting to withdraw money from the savings account would be liable to pay full taxes on the withdrawal amount. Besides, 10% taxes will also be applied to the amount. Therefore, when you are applying the tax condition, if, for example, you plan to withdraw 10,000 dollars, you will only get around 6000 dollars after the tax deductions. Therefore, this means that you will be going in a loss and would not profit from the savings you have made. Therefore, this is why it is not recommended to have an early withdrawal; however, you should only do so if there is any unavoidable circumstance present.
The 401 (k) loan options
Getting the loan option means that you will not lose money; however, the money will be replaced by the loans you will take. The loan money would be subsequently be charged by the paychecks that you would use. However, for this, also you need to check whether the loan option is made available to you by your plan or not. Personal loan plans are the most suitable ones if you want to replace your money and ensure that they are not being cut due to the imposed penalties.
The 401(k) Hardship Option:
In some cases, the hardship withdrawal option is also used to save yourself from the penalty imposed on you. However, the condition applies here as well. The fund would only be availed if there are some unavoidable circumstances and for which you need a heavy financial amount that is not available to you. These can include getting funds for a house, college tuitions, getting money for facing any economic crisis, or any other serious issue. The money that will be withdrawn from the account would not be subjected to any additional tax cuts and would be given as a whole. There will be no penalties imposed on this option. If you are looking to get the amount for birth or any adoption, then you can take out $5000 as a whole from your 401(k) account as well.
Disclaimer: This text is not financial advice.
After leaving Wells Fargo Bank in 2014, Daniel began a career as a finance consultant, advising companies and individuals on economic policy, labor relations, and financial management.
At Promtfinance.com, Daniel writes about personal finance topics, value estimation, budgeting strategies, retirement planning, and portfolio diversification.
Read more on Daniel Smith's biography page.
Contact Daniel: daniel@promtfinance.com