June 5, 2016
Home-Buying with Retirement Savings
Let’s say that you are ready to retire and that, in anticipation of that event, you want to buy the best place to retire. What financial resources might you use for a down payment? Maybe you own your own home, but are not quite ready to sell it. Perhaps you have never owned a home, but have been saving for one. However, you would rather not touch your nest egg yet.
Since you have been saving for retirement for decades, why not consider these resources as an option? Here are some ideas for “first-time home-buyers” to consider. Keep in mind that, according to the federal government, a “first-time home buyer” is not necessarily a first-time home buyer. The law defines a first-time home buyer as someone who has not owned a home in two years. So you may indeed qualify.
Traditional IRA:With a traditional IRA, you may withdraw up to $10,000 as a first-time homebuyer without incurring the 10% early withdrawal penalty that usually applies before the age of 59 ½ (but you will still have to pay income tax on the amount withdrawn). If both spouses tap their IRAs, they can double this amount.
Roth IRA. Similar to a traditional IRA, you may withdraw up to $10,000 from a Roth IRA for a first-time home purchase without triggering penalties. A withdrawal from a Roth IRA is considered a qualified distribution—as long as the account has been open for five years. Keep in mind that any funds withdrawn before the end of that initial five-year period may incur penalties.
401(k) loan: Withdrawing funds from a 401(k) to buy a home triggers steep penalties and taxes. But you can borrow from your 401K, either the lesser of $50,000 or half of your vested account balance. While you don't have to pay taxes on these funds, you do have to repay the loan on time. That timing and your obligations may be complicated if you leave your employer.
Of course, just because you can tap your retirement account for home buying doesn't mean that you should. What are some of the other factors to weigh?
1. With a 401(k) loan, you pay the interest to yourself. The 401(k) loan interest payments are meant to make up for some of the lost value by taking money out of your 401(k) early.
2. Avoid paying Private Mortgage Insurance (PMI). Putting down less than 20 percent down on a new home likely means getting stuck with PMI, which adds significantly to home-buying costs. Increasing the down payment helps avoid costly PMI.
3. A new home may be a strategic investment, with as much long term-value as retirement accounts.
1. Reducing the value and earning potential of retirement accounts. The more money in a 401(k) or IRA, the more that it is earning. Taking money out, even briefly, can reduce earning potential.
2. Consequently, it may be difficult to catch up on retirement savings. Reducing the earning potential of a retirement account means having to invest more later to catch up. With a new mortgage payment, that may be difficult to do.
So think carefully about your long-term goals before making a decision. But know that there are more options out there for home-buying than you might have imagined.
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