Coming up with the down payment can be one of the biggest
obstacles to home ownership. If you have a retirement account, you
may be able to borrow from it to get those funds, but it's an area
where you ought to proceed with caution.
All three major types of private retirement accounts - 401(k)s,
IRAs and Roth IRAs - offer options for tapping into them without
penalty in order to obtain money for buying a home. Some
employer-sponsored pension plans also allow participants to borrow
against them or make early withdrawals as well.
Before proceeding, you want to figure out just how much money
you'll need and weigh the merits of buying a home versus allowing
the money to continue to appreciate in your retirement account.
Owning your home outright can be part of a good retirement
strategy, but it's by no means the only thing to consider. A
financial advisor can help you sort through the pros and cons.
Of the private accounts, a 401 (k) offers the ability to obtain
money now while still keeping your retirement planning on track.
You can borrow up to $50,000 from your account, providing that you
don't exceed half your account balance, and pay it back over time,
The great thing about this approach is that the interest you pay
goes back into your account - you're basically paying yourself. So
your retirement account continues to grow on schedule. Most loans
from 401(k) accounts have to be repaid within five years, although
some will allow as long as 15.
On the downside, with this approach you not only have to budget
for your mortgage payment, but for paying back the loan to your
401(k) as well. Also, the interest you pay on a 401(k) self-loan is
not tax deductible, unlike mortgage interest.
The biggest downside with a 401(k) loan is that if you quit or
lose your job, you have to repay the entire amount within 60 to 90
days - otherwise, it's considered a distribution and you'll have to
pay a 10 percent penalty, in addition to being subject to income
With a Roth IRA, you can withdraw up to $10,000 penalty free for
the purchase, repair or remodeling of a first home, provided you've
had the account for at least five years. You don't have to pay
taxes on the withdrawal but you do have to use it within 120 days
to avoid the early withdrawal penalty if you're younger than age 59
The "first home" requirement is a bit of a misnomer, by the way
- it only means that you can't have owned another home within the
past two years.
In addition, you can withdraw any amount up to the total of your
contributions to the account at any age, without penalty or taxes.
It's only when you withdraw the earnings from a Roth IRA prior to
age 59 ½ that the penalty and taxes kick in.
Traditional IRA and pensions
If you have a traditional IRA, you can withdraw up to $10,000
penalty free for the purchase, repair or remodeling of a "first
home," same as with a Roth. The difference here is that you'll have
to pay taxes on the amount taken out.
Of course, neither a traditional or Roth IRA include a provision
for automatically repaying the amount withdrawn back into your
account. So unless you accelerate your contributions in order to
catch up (and which you won't be able to do if you're already
contributing the maximum each year), taking money out of either
type of IRA for a down payment will mean a permanent dent in your
Finally, some employers that still offer pension plans that
allow qualified employees to take early withdrawals or borrow
against their accounts. Of course, this will vary among different
employers and pension plans, so there's not much specific
information that can be provided here. If you're interested in
going this route, the best way to proceed is to contact your
pension plan administrator to learn what the rules and procedures
First published on MortgageLoan.com at: