Financial Education
If you’re ready to buy a home but you’re coming up short with your down payment, should you use your retirement savings? Borrowing or withdrawing money from your retirement accounts may help you achieve your immediate goal of buying a house, but it could also imperil your financial security in the future.
If you have an employer-sponsored retirement plan, such as a 401(k) or 403(b), you may be able to take a loan from your plan and pay it back with interest, depending on the rules of your plan. Or, you may withdraw funds from an individual retirement account (IRA). The decision is complicated and there are tax implications involved in each of these scenarios (see chart below).
| 4 Ways to Tap Retirement Accounts for a Home Purchase | ||
| Maximum amount | Pay income tax on the amount borrowed or withdrawn? | |
| 401(k) loan | The lesser of $50,000 or half of your vested account balance | No. However, if you leave or lose your job, you’ll have to repay the loan in full, otherwise it will be considered a distribution and you’ll owe income taxes plus a 10 percent tax penalty. |
| 401(k) withdrawal | Any amount up to your vested account balance | Yes. Ordinary income taxes will be due on the amount withdrawn. If you’re younger than age 55, you may have to pay an additional 10 percent tax penalty. |
| Traditional IRA withdrawal | Up to $10,000 for a first home purchase ($20,000 for couples) | Yes. You’ll pay income taxes on the amount you withdraw. If you withdraw more than $10,000, you may have to pay an additional 10 percent tax penalty if you’re younger than age 59 ½. |
| Roth IRA withdrawal | Up to $10,000 for a first home purchase ($20,000 for couples) | No. You can withdraw your contributions at any time without paying income tax if the account has been open for at least five years. However, if a portion of the withdrawal comes from investment earnings, you’ll pay income tax on that amount. |
It’s a risky move
Before you make a decision, be sure to consult a financial advisor and consider the following factors:
- Level of retirement savings: If your retirement savings balance is not where it should be, you’ll only fall further behind and lose out on the benefits of tax-deferred compounding if you drain your account now.
- Your age: If you have many years left before retirement, you’ll have time to make up setbacks to your retirement savings. However, for those nearing retirement age, it may be wise to leave your nest egg untouched.
- Tax situation: You may owe taxes on the money you withdraw from retirement accounts, and the financial impact of this depends on your income tax level and other factors. Be sure to review the potential tax implications of various scenarios with your tax advisor.
Explore all options
Have you considered other ways you can buy a home without taking from your retirement savings? For example:
- Refocus your savings — reduce your retirement contributions temporarily so you can save more for your down payment.
- Apply for a mortgage with no down payment or a low down payment.
- Take advantage of loan programs for first-time homebuyers.
The mortgage experts at PeoplesBank are here to help you achieve your dream of homeownership without undermining your retirement savings. We offer a full lineup of Loan Programs and we’ll help you find the best fit for you and your family.