Please understand before you read this that we are not a financial advisors or accountants. Consult with tax and financial professionals before making any moves within your retirement account. These professionals will further educate you on the risks and rewards to funding a down payment with your retirement account. Contrary to popular belief, there are some unique ways to utilize your retirement accounts for things other than retirement. Keep in mind, there are penalties and guidelines to follow, so make sure any of your advisers are hip to your scheming early on. They can provide tips and tricks to make sure you're doing it right from the beginning. Because every type of retirement account is different, and each person has an individual situation, we'll try to break down several different scenarios on how to fund a down payment with your retirement account.
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How to Fund A Down Payment with Your Retirement Account
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This may be your least difficult and least complicated option, however, it may not always work in your situation. All withdrawals from a Traditional IRA are taxable, but you and your spouse can take a maximum of $10,000 for your first home without penalty. You are considered a first time home buyer if it is your first home, or you haven't owned a home in 3 years.
Because your Roth IRA is funded with after tax contributions, you're always able to withdraw your contributions at any time for any reason, tax free. It gets slightly more complicated when you try to take out earnings on those contributions. If you and your spouse withdraw earnings from your Roth for a downpayment on your home, you will be subject to paying taxes and a 10% early withdrawl penalty (if you're under age 59-1/2). BUT WAIT! If you're withdrawing from your Roth to purchase your first home, you and your spouse can take $10,000 each towards your down payment and avoid the 10% penalty. If you've had your Roth for 5 years or more, you'll also avoid a tax bill.
The typical way to utilize your 401(k) to fund a down payment of your home is by taking a loan out against your 401(k). You will most likely only be able to borrow half of your balance (limited to $50,000) and you'll pay your loan back over time. The interest on the loan is typically the prime interest rate plus one or two points.
Obviously its easier to traditionally save for your down payment outside of your retirement account, however, if you have a major life change that requires a purchase of a home, this could be a great life line. Investing in a new home at these interest rates and prices will likely be an excellent choice. Please remember, there are other ways to fund your down payment and this may not be your best and only option. Let us know if you have any questions and we'll be happy to get you started in the right direction.
About the Author: Jared Reimer is a native Coloradoan and an Associate Broker at Elevations Real Estate in Old Town Fort Collins. He’s a community advocate, business champion, blogger, leader, tireless volunteer, innovator, thinker and expert on all things real estate in Fort Collins and surrounding Northern Colorado. You’re likely to find Jared spending quality time outside with his wife, Kacie, and young son, Hudson, or sharing a beer or two with a friend throughout Fort Collins. Call or text Jared at 970.222.1049 or email him at Jared@TheCraftBroker.com