As the parent of a child getting started in the world, you want to give him as much as possible to get ahead. Many times, young adults start out with debt from education loans and high interest credit cards, and often have to start their careers in low-paying entry-level positions making it difficult to get ahead.
One of the most crucial things you can do for your child is to ease as much of his financial burden as you can to give him the best possible financial start in life. One of the biggest things you can do for your son is help him buy a house. Your financial assistance could lower his monthly payment, eliminate PMI payments, and provide a stable home and investment for your son’s future.
If you are like many people, your largest source of available capital may be your 401k retirement account, and you may be wondering how can I help my son buy a house with my 401k? While a 401k may be your largest source of funds, the money is intended to be withdrawn upon retirement, and the IRS imposes hefty fines on early withdrawals (withdrawals made before the owner turns 59½ years old).
How Can I Help My Son Buy A House With My 401k? Your Options
The IRS allows for early withdrawals from a 401k account only in the event of personal hardships or for the purchase of a first home, and financing a second home is not permitted. Still, you may have some options for using your 401k to help your son buy a home, but keep in mind that you will incur taxes on your withdrawals, and possibly an additional 10% penalty if you are not yet age 59½.
How can I help my son buy a house with my 401k? You first option is to withdrawal the funds directly from your 401k account. This is by far the most expensive option, and you should be prepared to lose as much as 45% of your funds to taxes and fees.
This approach requires careful consideration, and you must also take into account lost revenue from investments when you are calculating the costs associated with early withdrawals. The retirement account experts at online brokerage ETrade, can better assist you in deciding if this method is right for you.
For most people, a far better option is to take out a loan against your 401k. If your plan allows it, loans are a significantly better alternative as you do not incur additional penalties on a 401k loan, and you repay yourself over time with interest.
The average length of time for a 401k loan is five years, although if you lose or leave your job before the loan has been repaid you may be forced to repay the entire amount within 60 days. You must also take into account the possible loss of interest and gains on your funds while they are not in your 401k.
Alternatives To Tapping Into Your 401k
How can I help my son buy a house with my 401k? If you still want to help your son with the purchase of a home, it is wise to explore additional ways you can help him out. If your primary reason for assisting him is to ease his financial burden you may consider co-signing for the loan or even offering to pay a percentage of the monthly mortgage bill.
Keep in mind that investing for your own future will also ease your son’s financial burden in the future. By being able to support yourself in retirement, you will alleviate the financial strain that can often be placed on children who’s parents cannot afford to support themselves.
Consult with a financial experts such as the professionals at ETrade, to find out how you can provide financial assistance for loved ones and plan for your own comfortable retirement.
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