For the first few years of my career in finance I worked with clients and their retirement plans. Often homeowners forget about their retirement accounts when purchasing a home. Depending on 401 plan rules, you may the have opportunity to use retirement funds. In this tight real estate market, you may need these funds for a down payment or just a short period of time. Here are four ways to use retirement funds for a home purchase:
- Loan. A 401k plan may off the possibility of taking a loan against your account. Plan rules can dictate the amount you may take for a loan, but the IRS guidelines are the less of $50,000 OR 50% of your account balance less any existing loans. A loan allows you to take money out of your 401k. You pay back the loan through your paycheck (principal plus interest). Always check with your 401k to determine loan availability and what the process may be. If you are taking out a loan for a short term, make sure you are able to pay back the loan in full.
- Hardship withdrawal. Unlike a loan, this is a withdrawal from the 401k, so you are not paying it back. There are very few reasons to withdraw money from 401k, but you may be able to for the purchase of a primary residence. Since this is a withdrawal, if you are withdrawing pre tax money, this will become a taxable event and you may be subject to a 10% penalty for withdrawing before age 59.5.
- 60 Day Rollover Rule. If you have funds in an IRA, you may be able to withdraw those funds. If it is a traditional or rollover IRA that has pre-tax money, it may become a taxable event and may result in a 10% penalty. If you need the funds for short term, you may be able to utilize the 60 day rollover rule, which is that you have 60 days to replace the funds back into the IRA to avoid taxes and penalty.
- Roth Contributions. Not all contributions are pre-tax; some can be Roth contributions, which are after tax. Your 401k may allow you to access any Roth contributions that you have made, OR you may have a Roth IRA. The caveat with accessing Roth monies is that the earnings are pre tax, so when you pull Roth money, you have to also pull the earnings. This means that earnings are taxable and may be addressed a 10% penalty.
Retirement funds may be a great option to purchase a home with. Always remember to consult your financial professional and accountant prior to using any of these options.
