Have you been putting off buying a home because the down payment feels too daunting? One way you can improve your chances of getting approved for a home loan is by putting at least 20% down at the time of purchase. Coming up with a 20% down payment may take many years of aggressive saving, but you might have another option. Your retirement account may not be a bad place to go for the funds needed to get you on the path to homeownership. The IRS offers certain breaks for taxpayers that choose to use retirement assets to purchase a first home.
You may be surprised to learn that you don’t have to be buying a home for the first time to be considered a “first-time” home buyer. According to IRS publication 590, a first-time homebuyer is any homebuyer that has had no present interest in a main home during the two years ending on the date of closing of the new house. In other words, if you haven’t lived in a home you owned for the last two years, you are considered a first-time homebuyer even if you owned a home before.
If you take money out of your traditional IRA before age 59½, there usually is a 10% penalty for early withdrawal. Still, the IRS offers an exception that allows you to withdraw up to $10,000 over a lifetime without penalty for first-time home purchases. While the distributions are not subject to penalty, they’re still subject to income taxes.
If you’ve had a Roth IRA for at least five years, any funds from it that are used for a first-time home purchase (subject to the $10,000 lifetime limit) are treated as qualified distributions. That means the amount distributed will not only be exempt from penalties, but also income taxes! If you have not owned a Roth IRA for at least five years, your distribution might still be penalty-free, but some or all of it could be subject to income taxes.
The only way to withdraw money from your employer-sponsored retirement plan, such as a 401(k)), for a home purchase while you’re working and under age 59 1/2 is through a hardship withdrawal. Fortunately, purchasing a home is one of the reasons allowed for a hardship withdrawal, but you will have to pay an early withdrawal penalty if you’re under age 59 ½.
Only you can decide what’s best for your financial situation, and it’s always wise to consult with a CPA. If you plan on using the equity in your home as supplemental income during retirement, some investors might consider using your retirement funds as a down payment to purchase a home a good way of diversifying your retirement portfolio. However, if you have trouble making payments on the loan for some reason, not only could you end up losing your place to live, but you could also jeopardize part of your retirement nest egg.
If you need other ideas for how to save up money for a down payment on a home, call a loan representative at Primary Residential Mortgage. We’re always happy to help.
Note: Opinions expressed are solely my own and do not express the views of my employer