Many loan programs require you to have some type of down payment. If you don’t have the cash lying around but you do have quite a bit invested in your retirement funds, you might think of tapping into your 401K. Even though the money is meant for your golden years, you probably figure it’s not doing you any good just sitting there right now.
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loan programs allow the use of retirement funds for the down payment, which is good. But before you do, you should know the pros and cons of doing so, this way you can make the right decision.
The Benefits of Using Retirement Funds for a Down Payment
Before we begin, you should know that choosing to use your retirement funds for a down payment is a personal decision. There is no right or wrong answer. We will discuss the benefits, but you should see how they pertain to your life before making a decision.
- You may have access to the funds you need quickly. If you don’t have anything saved in a liquid account for your down payment, it could take a long time to save what you need. If you have the funds readily available in your retirement account, though, you can
purchase a house quicker.
- The funds should be fairly easy to access. The method and time it takes to get the funds will depend on your employer. It’s best to talk to your HR department about how to borrow the funds and about how long it might take.
- You borrow the money from yourself, which means you pay yourself the interest when you pay it back. Even though it will cost you in interest, it’s money that you are investing in your future rather than paying the interest to a bank.
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The Disadvantages of Using Retirement Funds for a Down Payment
Of course, with the good must come something bad. We tell you the disadvantages so that you can weigh them against the benefits to see if borrowing from your retirement funds is worth it.
- You stand to lose quite a bit of your retirement money just by taking the money out of the account. You miss out on the compounding interest, which could amount to a decent amount depending on how long you have the money out of the account.
- If you leave your job, you may have to pay the entire amount back in a relatively short time. Make sure you know your employer’s rules regarding this so that you can make a wise decision.
- You could pay serious penalties and taxes if you don’t follow the rules of your 401K or IRA. It’s always best to discuss this option with your tax advisor so that you know what to expect.
Withdrawing Funds From Your IRA
If your retirement funds are in an IRA rather than a 401K, you are subject to different rules. You don’t have to talk with your employer about what to do. The IRS allows you to withdraw up to $10,000 from your IRA without penalty if you are purchasing your first home. There’s a catch though. Even if you’ve owned a home before, but it’s been 2 years since you’ve owned one, you are considered a first-time homebuyer again. This means you can take advantage of the $10,000 withdrawal.
You don’t have to pay the
early withdrawal penalty, but you will have to pay taxes on the money you withdraw, so keep that in mind.
Whether you have a 401K or an IRA to withdraw funds from you should give it careful thought. A down payment is important, especially if you are looking at a conventional or FHA loan. But, withdrawing the funds early could have serious consequences. Make sure if you withdraw from your 401K that you can afford the required payments (each employer is different). If you withdraw from an IRA, make sure you are aware of the tax consequences and that you can afford them as well.
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