Using Retirement Savings for a Down Payment: Pros and Cons

Written By Mary Beth Eastman
Last updated February 20, 2019

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buying a house
February 7, 2019

Simple. Thrifty. Living.

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.

About the Author

Mary Beth Eastman

Mary Beth Eastman serves as the content manager for Simple. Thrifty. Living, where she is dedicated to helping readers use money and credit wisely. Mary Beth believes that access to the right financial information paired with a growth mindset are essential tools for getting out of debt and building wealth. Mary Beth has a degree in Journalism from Bowling Green State University and has focused her 20-year journalism career on putting readers front and center, carefully considering their concerns and presenting information that will help them in their everyday lives. She has won numerous statewide journalism awards. Her writing on personal finance as been featured on numerous websites in addition to Simple. Thrifty. Living, including Huffington Post and Lexington Law blog. Mary Beth resides in Pittsburgh, Pa., with her family and two rescue dogs.

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