Should you borrow from your retirement savings for a down payment?
Make sure you understand the rules and risks before tapping your 401(k) or IRA to buy a home.
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Q: It looks like I'm going to need to take money from my retirement savings to make a down payment on a house. Which is better to tap for a down payment — a 401(k), a Roth IRA or a traditional IRA? Can I avoid the penalties and taxes for withdrawing money if I'm buying a home? (Bing: What is an individual retirement arrangement?)
A: Your best bet is to tap your 401(k). You can generally borrow up to half of your balance, up to a maximum of $50,000, from the account at any age and for any reason without tax or penalty. The interest you pay on the loan, generally the prime rate plus one or two percentage points, goes back into your account.
Loans from 401(k)s usually must be paid back within five years, but your employer may give you up to 15 years to repay a 401(k) loan if you are borrowing the money to buy a home. Your employer will usually start deducting the monthly loan payments from your paycheck right away.
There is one major drawback to borrowing from a 401(k): If you lose or leave your job, you generally have just 60 to 90 days to pay back the loan or it will be considered a distribution — and will be subject to taxes, plus a 10% early-withdrawal penalty if you're under 55 when you leave your job.
Taking the money from a Roth IRA for a down payment is your next best choice. You can't borrow from the account and return the money to it, as with a 401(k), but you can withdraw up to the amount of your contributions tax-free and penalty-free for any reason and at any age. If you withdraw earnings from a Roth before age 59½, you generally must pay taxes and a 10% penalty; after age 59½, you can withdraw earnings penalty- and tax-free, as long as you've had the account for at least five years. But if you're using the money to purchase your first home, you and your spouse can each withdraw up to $10,000 in earnings from your Roth IRAs without the 10% early-withdrawal penalty, even if you're under 59½. You'll also avoid a tax bill on that withdrawal if you've had the account for at least five years. If you don't meet the five-year test, you'll owe taxes on that $10,000, but not the 10% penalty.
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First-home rules are least advantageous for traditional IRAs. You and your spouse can each take up to $10,000 from your traditional IRAs for a first-home purchase without the 10% early-withdrawal penalty, but the withdrawal is still taxable.
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You don't have to be a first-time homebuyer to qualify for the first-time-homebuyer exceptions, but you can't have owned a home in the previous two years. If you already own a home, you can still take the 401(k) loan or withdraw your contributions to a Roth IRA without penalties or taxes, but you won't qualify for the $10,000 penalty-free IRA withdrawals.
For more information about IRA withdrawal rules, see IRS Publication 590, Individual Retirement Arrangements.
Using the term borrow from an IRA is not a good choice of words. Publication 590, Individual Retirement Arrangements, states that borrowing from an IRA is prohibited.
Why would you sacrifice your retirement to buy more house than you apparently can afford. You are borrowing money so you can borrow even more money. If something happens to the housing market or your job, like so many people have just noticed, you will be without a home, without a retirement and without any cash. I agree with Blank-en-ship. Save your money which means some sacrifice, make your down payment on a house you can afford, work 40 years and make contributions to your retirement program and retire with a comfortable life-style that you saved for.
I have been working for 45 years, making a modest living, have had to change jobs 5 times through no fault of my own, lived in the same 1500 sq ft house in a simple neighborhood, put two kids through college, am completely dept free, just bought a new-to-us car and will retire in 12 months with no pension but $650,000 in our retirement account. Adding social security to that we can live our present life-style well into your 90's. Works for my wife and me.
1. There are HUNDREDS OF TRILLIONS of DOLLARS in 401(k)s in this country! 2. MOST people DON'T KNOW that THEY have the RIGHT to SELF DIRECT THEM! LIKE in REAL ESTATE! 3. I bet Coachpops is buying up foreclosures, reo's and distressed properties at a low price and using a number of vehicles as an end game! FOLKS, HE IS RIGHT! LET me ask you this, what do you think is easier to find, A JOB or A FORECLOSURE? If you want to learn what HE obviously KNOWS and will SHARE, CONTACT HIM. HE IS RIGHT!
The money you borrow for your real estate deal goes back into the Roth, and the MONEYS YOU GAIN IN THE DEAL MUST GO IN BACK TO THE ROTH, TAX FREE!!! That the law!
IF YOU WANT TO LEARN HOW CONTACT ME! TEXT MONEYNOW at 41411
It is advice like the junk seen in this article that gets people into ridiculous amounts of debt and ultimately foreclosure or bankruptcy. You do not need a huge income every year to be financially secure, but you do need to take good care of what you have and avoid debt like the plague. Buy a house only when you truly can afford to buy a house. Do not risk your retirement for a home. If you have to risk your retirement then you cannot afford it.
In todays environment with corporate ceo's and boards raiding companies with excess pay along with money managers the house of cards will eventually fall. Your best bet is to put your money in housing to hedge against inflation.