If you’ve been socking money away in a retirement account and are ready to buy a home, you could tap into that savings to boost your buying power. There are several ways to use retirement funds to put a down payment on a home.
Here are the basic options to tap into retirement savings to purchase your first home:
401(k) loan. If you withdraw funds from a 401(k) to buy your home you will trigger steep penalties and taxes. A more economical option is to borrow from your 401(k) to buy a home. You can borrow up to the lesser of $50,000 or half of your vested account balance. You don’t have to pay taxes on the money, but you do have to repay the loan on time. The timing for repaying the loan varies, but keep in mind that if you leave your current employer, you may have to pay back the funds upon severance to avoid penalties.
Traditional IRA. You can withdraw up to $10,000 form a traditional IRA to buy a home for the first time without paying a tax penalty, though you will have to pay income tax on the amount withdrawn. If both spouses tap into their individual accounts, you can double this amount.
Roth IRA. If you have money in a Roth IRA, you can withdraw contributions at any time, since it’s after-tax money. However, if you withdraw investment earnings within five years of opening your account or before age 59 1/2, you may have to pay penalties on those earnings. As with a traditional IRA, you can use up to $10,000 for a first-time home purchase without triggering penalties. However, you may have to pay income tax on any portion of the withdrawal that comes from investment earnings.
These are the ways that…