While it’s always better and preferable to use money that you have on hand for buying a home, you might want to consider withdrawing from your retirement account if this isn’t possible. However, take note that you can’t make up the funds you withdrew, plus there’s the opportunity cost to think about.
When Using Retirement Funds
Let’s say you have $10,000 in your 401k or IRA. Rather than use it for your down payment, it could potentially increase up to $54,000 in a span of 25 years (given a 7% annual return). If you need to withdraw from your retirement accounts, an ideal option is to withdraw from a Roth IRA (if you have one) since it’s tax-free.
What if You Don’t a Roth IRA?
If you only have a traditional IRA, you could withdraw $10,000 from it without having to pay a 10% penalty. However, loan officers from mortgage companies in Fort Myers noted that the amount would also be added to your state and federal income taxes. They add that you would likewise be incurring the 10% penalty and adding it to your income taxes if you withdraw more than $10,000.
What if You Only Have 401k?
If you only have a 401k, you could either take a hardship distribution or loan (if your company allows it). If you take a loan, it’s considered non-taxable and you could simply pay it back. The last thing you should consider is to take a distribution according to the hardship rules of the Internal Revenue Service (IRS). This is taxable and you might have to take a loan first prior to the hardship distribution. You would also incur the 10% penalty if you were younger than 59 years and six months old.
Saving enough money for an investment or bank account is a preferable way to pay for your down payment instead of withdrawing from your retirement account. If taking a distribution is the only way, you should first consider taking from your Roth IRA. If not applicable, your traditional IRA or 401k.