Are You Allowed to Use a Retirement Account When Purchasing a Home?

Your bank account my not be in the best of shape, but you still want to buy a new home. A down payment will likely be required, but it could take you years to save 5%, 10% or even 20% of the purchase price of an average home. About 69% of Americans have less than $1,000 in savings, according to Go BankingRates. Even worse, about 34% have nothing saved.

While it may seem like it will be impossible to save for your down payment, you may already have the money without realizing it. Often, homebuyers use their retirement accounts for the down payment.

Financial advisers may not always recommend this as the money has been set aside for retirement. However, it’s still your money to do with as you please. While it may not be wise if you’re only a decade or so away from retirement, for the younger home buyers, it could work out very well. Here’s how you can use your IRA or 401(k) to help with purchasing a home.

The IRA

Whether you have a Roth IRA or a traditional, you can use the funds to help you buy a home. However, you cannot take out a loan against your IRA and will have to take a disbursement. You may be worried about the 10% penalty for early withdrawals, but you can avoid this even if you have yet to turn 59.5 years old.

However, you may still have to pay taxes on the funds you withdrawal, if you take money from a traditional IRA. With Roth IRA funds, you’ve already paid the taxes, so you won’t have to worry about it, as long as you’ve had the account for at least five year.

With the Roth IRA, you do need to be careful, however. You want to use only contributed money, not the earnings. This will help to ensure you avoid any other penalties and taxes.

Using Your 401(k) Funds

Your 401(k) provides unique options for getting the money you need for a down payment. Most are employer-sponsored and will allow you to borrow against the money in the account. If your plan allows you to take out a loan against your 401(k), this could be an easy way to get the down payment money you need to buy a home.

Before you go this route, make sure you understand the restriction you may have with a loan, how much you can take out and the other rules. They can vary from one employer to another and it could limit you a bit.

The best part about this type of loan is the lack of a bank involved in the process. You won’t need a credit check and you won’t need to be approved by a bank. The cash will arrive faster and you won’t have to worry about dinging your credit due to having it pulled.

However, if you do borrow against your 401(k) and you’re unable to pay the loan back per the terms, you will be reported to the IRS. Most employers will set up automatic deductions from your paycheck for the loan payment, however.

It’s also important to be aware that employers often want immediate repayment or within 60 days if you leave the company. This will likely be the case if you quit, get fired or even get laid off.

While taking a loan out against your 401(k) may seem like a good idea, you may be able to simply cash it in and use the funds for your down payment. You will likely have to pay a penalty, but this could still give you the money needed to buy a home.

While it may be best to take the time to save up the necessary funds for your down payment, using your IRA or 401(k) provides another option. For younger folks, this could work out great as you have plenty of time to replenish your retirement account or pay back a 401(k) loan. However, if you’re inching closer to retirement, this may not be the best solution.

It’s important to explore all the possible avenues for getting your down payment funds. You may qualify for a grant or a lower/no down payment financing program, which could also help. However, if you don’t have another option and buying a home not only makes sense, but also seems like the right move, using your retirement account may be a good choice.