Using Retirement Savings for a Down Payment: Pros and Cons
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Getting in on the housing market may seem like a sound financial goal. Using your retirement funds for a down payment might not be right for everyone, however, and may come with unexpected costs. Here’s how to weigh your options and make the best decision for your life now and in your retirement years.
Depending on the type of retirement account, you may incur a tax penalty if you use the money for a down payment. Look closely at the effects of using funds from a 401(k), IRA or RothIRA.
- 401(k): If you withdraw money from your 401(k), you pay tax on the money as if it was ordinary income. It’s also possible you’ll be hit with an additional 10 percent penalty if you take the money out before the age of 59 1/2. Another option is to borrow money from your 401(k). If you do so, you can borrow up to half of your vested amount up to $50,000. There is no penalty to take out a loan, but you have to comply with the payment schedule and may have to pay the money back early if you leave your employer.
- IRA: First-time homebuyers can take out up to $10,000 from their IRA for a down payment. There’s no penalty, but you do have to pay tax on this money as if it were ordinary income. If you’re part of a couple, you each can take out $10,000 towards the same house.
- RothIRA: Since RothIRA contributions are made after-tax, you don’t have to pay tax upon withdrawal. You can also take out up to $10,000 of the money you’ve made inside the RothIRA (i.e. your investment income) towards the purchase of your first home. If you’ve had the RothIRA for at least five years, the earnings can be taken out tax-free.
Whichever route you choose, it’s important to analyze it in the context of your entire financial picture — including how many years you have left until retirement.
It’s important to note that people are living longer and you may have potentially a few decades of living after you stop work. Before taking cash out of your retirement account, it’s a good idea to sit down with a financial advisor and weigh the potential asset of the house versus its costs (property taxes, maintenance fees, utilities). You should have a sense of your overall retirement picture, including income from savings, investments, pensions and social security before making a large withdrawal.
Whatever you choose, the various investment vehicles give you options! You can make the move that’s best for you and for your family.
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