How to tap retirement savings for down payment money.
Money Girl
301 MG Ways to Use Retirement Savings to Buy a Home
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At Midas, we're on a mission to redefine car care, where get this, we talk to you like a real person, helping you plan for today and down the road. Imagine that. We're driving forward with this in mind. Reroute to Midas, where we're putting an end to BS. [MUSIC PLAYING] Hi, friends. I'm Laura Adams, and you're listening to the Money Girl Podcast. If you want to buy a home, but don't have enough save for a down payment, you might wonder if it's possible to tap your retirement fund for this special occasion. There are certain situations where using a retirement account to buy a home is allowed, will cover the rules, and whether using retirement savings for a down payment is a good idea. Retirement plans that you can only get through an employer, such as a 401(k) or 403(b) are the most popular types of retirement accounts. If you have one, there are two ways to tap it, taking a loan or making a withdrawal. Taking a loan from a workplace retirement account is always the best option, because you're obligated to repay yourself with interest over a set period of time. When you take a withdrawal, on the other hand, you're actually not allowed to repay it, except by bumping up the amount you contribute from each paycheck. But not all workplace retirement accounts are set up to allow loans. If they are allowed, there's a limit to the amount you can get. You can only borrow half of your vested balance, up to $50,000. Vested funds are those that you own, and you're always 100% invested in the contributions you make. However, in some cases, money from your employer, such as matching or profit-sharing funds, may be tied to a vesting schedule that gives you ownership over time. Retirement account loans come with a set interest rate and term spelled out in the planned document. The repayment period is typically five years, but it may be longer for a home purchase. If you repay a loan on time, you don't have to pay any income tax or a penalty on the borrowed funds. However, one of the biggest problems with taking a loan from your 401(k) or 403(b) is that if you don't repay it on time, the outstanding balance is generally considered an early withdrawal subject to income tax plus an additional 10% penalty if you're younger than age 59.5. That means if you leave your job or get fired, you'll probably have to come up with the entire outstanding loan balance within a very short period of time, such as 60 days. So be sure to read your retirement plan document or ask your benefits administrator for all the details on taking a loan before signing up. In Colorado, our freedoms are everything. Gabe Evans would rip them away. Just like Lauren Beaubert, he'd ban abortion without exceptions for rape or incest, and overturn the right to marry for same-sex couples. Don't let him take our freedoms. Paid for by DCCC, www.dccc.org, not authorized by any candidate or candidate's committee. Now at T-Mobile, get four 5G phones on us and four lines for $25 a line per month when you switch with eligible trade-ins. All on America's largest 5G network. Minimum of four lines for $25 per line per month without a paid discount using debit or bank account, $5 more per line without auto pay plus taxes and fees and $10 device connection charge. Phones would be a 24-monthly bill credits for well qualified customers, contact us before canceling entire accounts to continue bill credits or credit stop and balance on a required finance agreement to bill credits and if you pay off devices early, ctmobile.com. If you've ever felt like the auto repair business is broken, you're not alone. Everybody's over. From talking down to selling up to car-splaining mechanics, you're just done putting up with BS, bad service. At Midas, we're on a mission to redefine car care where, get this, we talk to you like a real person helping you plan for today and down the road. Imagine that. We're driving forward with this in mind. We're out to Midas where we're putting an end to BS. If your 401k or 403b doesn't allow loans or you need more than the allowable loan amount, you may be eligible to take a hardship withdrawal, again if permitted by your plan. Certain qualifying events, such as buying, repairing or preventing foreclosure on a primary home fall under the hardship category. But the bad news is that a hardship withdrawal always comes with income taxes and that 10 percent early withdrawal penalty if you're younger than age 59 and a half. Plus, you're typically restricted from making contributions to your retirement account for six whole months. Therefore, my recommendation is to never take a hardship withdrawal from a workplace plan. You'll pay hefty taxes, miss out on contributions and potential employer matching funds and be left with a depleted retirement account. Another type of retirement account that's available to just about everyone is the Individual Retirement Arrangement or IRA. You contribute to a traditional IRA on a pre-tax basis and to a Roth IRA on a post-tax basis. With either type of IRA, loans are not permitted but you can take a withdrawal in certain cases. For a traditional IRA, you're allowed to withdraw up to $10,000 for a down payment but only if you're a first-time homebuyer and you must pay taxes on the withdrawal but you get to avoid that 10 percent early withdrawal penalty even if you're younger than age 59 and a half. Now the rules for taking a withdrawal from a Roth IRA to buy a home are much more favorable than for a traditional IRA. Once you make contributions to a Roth on an after-tax basis, you can withdraw them for any reason without owing taxes or a penalty no matter your age. However, if you tap the growth or earnings on your original contributions, taxes and the early withdrawal penalty will apply. So, if you need to tap a retirement account to buy a home, taking a modest withdrawal from your Roth IRA is the best option. However, Roth IRAs are capped so those with higher incomes can't make contributions. For much more on this topic, be sure to listen to episode number 272 called "Your Guide to the Roth IRA Part 1". Owning a home of your own can be a very smart investment especially with today's low market prices and interest rates. Just make sure you tap any type of retirement fund with caution because depleting it means you're giving up the opportunity to build wealth. It's a good idea to consult with a financial advisor so you carefully weigh the pros and cons of such an important decision. While taking a loan or withdrawal from a retirement account may make sense for some home buyers, the best scenario is to have plenty of savings so you don't need to touch your retirement nest egg in the first place. And if you're not subscribed to the MoneyGirl podcast on iTunes, that's how most people get the show. Subscriptions are free and allow you to get each new weekly episode the moment it's released on the web. To connect with me on social media, submit a question, or read a transcript of any show, visit the MoneyGirl page at quickanddirtytips.com. I'm glad you're listening to Ching. That's all for now, courtesy of MoneyGirl, your guide to our richer life. In Colorado, our freedoms are everything. Gabe Evans would rip them away. Just like Lauren Bobert, he'd ban abortion without exceptions for rape or incest, and overturn the right to marry for same-sex couples. Don't let him take our freedoms. 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