Saving up cash for a home down payment can definitely try your patience, especially as the first time home buyer tax credit deadline rapidly approaches. There are options other than selling your kidney to come up with some quick cash. Why not withdraw money or take out a loan from one of your retirement accounts? My gut advises against this decision, even if it means missing out on the first time home buyer’s credit. The biggest reason has to do with diminishing the power of compound interest. After all, compound interest is what makes a comfortable retirement a real possibility for the average Joe. But if you insist, I’ve given you two different options to consider:
Withdraw Contributions and/or Earnings from a Roth IRA
Contributions to a Roth IRA differ from those made to a regular IRA. Roth contributions are made after tax resulting in tax free withdrawals at retirement. Traditional IRA contributions are made pre-tax resulting in taxed withdrawals at retirement. The cool thing about a Roth IRA for this discussion’s purpose is that you can withdraw your contributions any time for any reason, tax free. In addition, $10,000 in earnings may be withdrawn penalty free if used for a down payment, if your account is 5 years or older. If you are going to tap a retirement account, I would recommend tapping this before taking out a 401(k) loan.
Take A Loan From Your 401(k)
When borrowing money from your 401(k) to be used for a down payment, you might be able to extend your repayment period for the length of your mortgage. Not bad. However, keep in mind that there are some major draw backs and significant risks associated with your choice to borrow from your 401(k). Please keep in mind that even though money in your 401(k) is your money, it’s not the same as money sitting in your savings account waiting to be used. It is a loan. If you use these funds, you will have to repay the loan or face the consequences. For example, if you lose or change jobs, you’ll be forced to pay back the loan almost immediately. If you are unable to repay, you’ll have to pay income tax plus a 10% early withdrawal penalty. If you must find quick money for a down payment, don’t have a Roth IRA, and are willing to accept the risks, taking out a loan from your 401(k) might be the right choice for you.
Has anyone used one of these two strategies to come up with quick money for a down payment?
Broke – One long word for you “NOOOOOOOOOOOOOOOOOOOO”! Don’t do it. It’s absolutely nonsense.
If you have a chance, please please read my 30/30/3 rule for home buying. You’ll save yourself a lot of money and headache, as well as the rest of the homeowner population. This is how we got to this bubble mess in the first place.
So many honest, on-time paying homeowners got slaughtered b/c people overreached and bought what they could not afford.
Thnks man. No need to rush buying a home!
Financial Samurai – I definitely agree with you. My advice would be to wait and save up money, leave the retirement accounts alone, and purchase later when you are ready!
Good stuff man! Interesting to see that home prices rebounded for a 4th straight month this morning!
I better go buy another rental quick!
I agree with the master (Financial Samurai). I did it and hate the fact that I did. I haven’t calculated how much I’ve lost by doing it but I know my financial situation is worse because of it. Save up first. As I look back, had I have waited the house I bought would have be $40,000 cheaper. That would mean I would not have had to tap the 401K to begin with.
Good Luck
Jeff, I was hoping to hear from someone who had actually gone this route. It sounds like your timing couldn’t have been worse. Sorry man. If you wanted to find the bright side, had you left the money in 401(k) it probably would have tanked over the past year anyways??