This is a good article for a commonly asked question.
Use retirement savings to buy a house?
- The rules about tapping into retirement vary with the type of account.
- First-time homebuyers can borrow $10,000 from an IRA without penalty.
- Withdrawing from savings means losing long-term growth opportunities.
Rock-bottom mortgage rates, affordable home prices and rising rents are enticing renters into homeownership. Some first-time buyers who lack the cash for a down payment and closing costs are turning to their retirement savings accounts for money to buy a house.
There are two ways you can leverage your retirement savings to buy a house:
- Borrow or withdraw from a 401(k) or individual retirement account.
- Reduce or eliminate your retirement savings contributions temporarily to save for a down payment.
“Right now, affordable prices and low interest rates offer an unusual opportunity to buy a home, so we do sometimes recommend that our clients borrow against their retirement,” says Ben Barzideh, a wealth adviser at Piershale Financial Group Inc. in Crystal Lake, Ill. “Owning a home is an important way to build financial security.”
Timothy Johnson, chief investment strategist with Lincoln Financial Advisors in Nashville, Tenn., says withdrawing money from retirement savings should be approached with caution. “While owning a house is a good idea, you should make sure you can reach your other objectives, too,” he says. “A younger person will hopefully have a long time to rebuild retirement savings, so borrowing or withdrawing some of it isn’t necessarily wrong, but they shouldn’t take unnecessary risks, either.”
Borrowing or withdrawing from retirement savings
Doug Benner, a senior loan officer with Embrace Home Loans in Rockville, Md., says borrowing from your retirement is much better than withdrawing money because you can repay yourself.
The rules about how you can leverage your retirement savings vary according to the type of investment.
Borrowing for a 401(k)
“If you have a 401(k), you can borrow up to $50,000 or half of your vested balance, whichever is less,” Barzideh says. “You are required to pay back the loan with interest, though, so you’ll have another debt to pay that digs into your cash flow. Some 401(k) accounts require repayment within five years.”
“One downside, though, is that you are less diversified in your investments if you are putting cash into a home instead of stocks and bonds,” Johnson says. “The biggest problem is that if you leave your job, you might be forced to repay the loan in full because you are no longer a participant in the 401(k) plan. Some plans will let you continue to make payments, but others won’t.”
Johnson says if you don’t repay your 401(k) loan in the allotted time, it will become an early withdrawal, triggering a 10 percent penalty and income tax payments on the loan amount.
Using money from an IRA
If you have a traditional IRA, Barzideh says you can borrow up to $10,000 for a down payment without paying a tax penalty if you are a first-time homebuyer, although you will have to pay income tax on the loan. If you are married, each spouse can borrow up to $10,000 for a total of $20,000.