Most of the renters/tenants are thinking of homeownership due to the present affordable home prices, low mortgage rates, and rising rents. It should be noted here that some of the first-time buyers who lack the cash for a down payment and closing costs take help of their retirement savings for money to buy a house.
There are mainly 2 ways in which you can use your retirement savings to purchase a home:
- Borrow or withdraw money from a 401(k) or any other individual retirement account.
- Lower or eliminate your retirement savings contributions for the time being to save money for a down payment.
Every one of us will agree to one fact that owning a home is an important way to acquire financial security. However, it should also be kept in mind that while owning a house is a good idea, you shouldn’t ignore or avoid your other objectives. If you’re young, you will be able to build up a retirement savings in the long run. So, borrowing money from the retirement account is wrong. But that doesn’t mean that you will be taking unnecessary risks.
Taking out money from retirement savings
It is always said that borrowing money from your retirement savings is much better than withdrawing money from the account because you can repay yourself. However, you should note that how you can control your retirement savings vary according to the type of investment. In case of a 401k account, you will be able to borrow up to half of the vested balance or $50,000, whichever is less. You are required to pay back the loan with interest. There are some 401(k) accounts that require repayment within 5 years.
It should be noted here that withdrawing funds from a Roth IRA is the most advantageous because the withdrawal of money from the account is tax-free and penalty-free. However, Roth accounts are capped so that higher-income people cannot have them.
Lowering or eliminating contributions
Lowering or eliminating retirement savings is considered to be one of the alternatives to withdrawing or borrowing from retirement accounts. But if you go for this option, you'll be missing out on tax advantages. You may also lose on the employer match with a 401(k) plan. In order to be on the safe side, you will save up to the employer match while you are saving for a down payment. If you don’t do so, you will be throwing money away.
Eligibility for loan with retirement savings
In order to get a loan with the help of retirement savings account, any withdrawal from retirement account must be documented. You should check out the rules of your particular account before hand and check out how much you will have to repay. It should be noted here that it can take 3 weeks to get the money from a 401(k) account. The money should be in your account for at least a week before closing in order to make sure that the funds are available. Also, you must see the funds within 120 days for your down payment to avoid a penalty in case of a traditional IRA.