"Financial experts widely agree that using 401(k) funds for homeownership is risky because it can significantly undermine long-term retirement security by incurring taxes and penalties, and, most importantly, by causing a permanent loss of compound growth on the withdrawn amount. Lost Compound Growth: The primary risk is losing years of compound interest, which is the engine of retirement savings growth. A hypothetical $100,000 withdrawal could result in missing out on roughly $474,000 in potential growth over 30 years."
"Taxes and Penalties: A direct withdrawal before age 59½ is typically subject to a 10% early withdrawal penalty in addition to regular income tax, which can reduce the usable amount by a third or more. Liquidity and Risk: While home equity builds wealth, that wealth is illiquid and difficult to access for emergencies like medical bills or long-term care, unlike a diversified retirement portfolio. Job Loss Risk: If you take a 401(k) loan and leave your job (voluntarily or involuntarily), the remaining balance often becomes due in full by the next tax filing deadline, or it is treated as a taxable withdrawal with penalties."
Using 401(k) funds for homeownership threatens long-term retirement security through taxes, penalties, and a permanent loss of compound growth. A $100,000 withdrawal can forfeit roughly $474,000 in potential growth over 30 years. Early withdrawals before age 59½ typically incur a 10% penalty plus income tax, which can shrink the usable proceeds by a third or more. Home equity is illiquid and hard to access for emergencies compared with a diversified retirement portfolio. 401(k) loans become due if employment ends and may convert to taxable withdrawals with penalties. Alternatives include 401(k) loans, IRA first-time homebuyer exceptions, low-down-payment mortgages, and down payment assistance programs.
Read at Boston Condos For Sale Ford Realty
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