Should You Use Your Retirement Savings To Buy A Home?

May 01, 2018

First-time home-buyers are often surprised by the requirements of obtaining a mortgage, especially when it comes to the down payment. One way you can improve your chances of getting a home loan is by putting at least 20% down at the time of purchase. For existing homeowners like me, coming up with a 20% down payment usually starts with selling the home I’m in right now and using the equity to make a down payment on my next home.

But what about someone that may be buying a home for the first time? Coming up with a $50k down payment on a $250k home may take several years of aggressive saving, but your retirement account may not be a bad place to go for the additional funds needed to get you on the path to home ownership. In fact, the IRS offers certain breaks for taxpayers that choose to use retirement assets to purchase a first home. Here’s how it works.

Who qualifies as a first-time homebuyer?

Interestingly enough, you don’t actually have to be buying a home for the first time in your life to be considered a “first-time” homebuyer.  IRS publication 590 defines a first-time homebuyer as any homebuyer that has had no present interest in a main home during the 2-year period ending on the date of acquisition of the new home.

In other words, as long as you haven’t lived in a home you owned for the last two years, you are considered a first-time homebuyer even if you owned a home previously. If you are married, your spouse must also meet this no-ownership requirement.

Using your IRA

Most people know that when you take money out of a traditional IRA prior to age 59½, there is usually a 10% penalty tax for early withdrawal. However, the IRS offers an exception for first-time homebuyers that allows first-time homebuyers to withdraw up to $10,000 over a lifetime without penalty for first-time home purchases. Keep in mind that while the distributions are not subject to penalty, they are still subject to income taxes. $10,000 probably won’t be enough to cover your full down payment, but it can help.

Does it make a difference if I use a Roth IRA?

It does. If you’ve owned a Roth IRA for at least five years, any distributions used for a first-time home purchase (subject to the $10,000 lifetime limit) are treated as qualified distributions. That means the amount distributed will not only be exempt from penalties, but also income taxes. If you have not owned a Roth IRA for at least five years, your distribution may still avoid penalties but some or all of it may be subject to income taxes.

How to use more than $10,000 from your Roth IRA

One thing you should understand is that Roth IRA distributions are subject to ordering rules, which basically means any money you put in comes out first and is therefore not subject to taxes or penalties (since you already paid taxes on the money before it went in). Therefore, the exception described above is really only applicable after you have withdrawn all of your contributions, so many people find themselves withdrawing all of their initial contributions PLUS $10,000 of growth, with no tax consequences.

Using your 401(k) or 403(b)

The same exception doesn’t apply to your retirement account through work — the only way to withdraw money from you employer-sponsored retirement plan (e.g. 401(k)) for a home purchase while you are working is through a hardship withdrawal. Buying a home is one of the reasons allowing for a hardship withdrawal, but you will pay that early withdrawal penalty if you’re under age 59 1/2 and any pre-tax withdrawals or growth in your Roth 401(k) will be taxed as well.

Using a plan loan instead

Some people use the 401(k) loan provision to access those funds to buy a home without the tax consequences, but it’s important to factor in that you’ll have to pay the funds back in order to avoid taxes and penalties. Many companies give you longer than the standard 5 year pay-back period to repay a residential 401(k) loan, but you may have to prove that you actually closed on a home in order to maintain the longer pay-back period. Also, if you leave work before paying off the loan, many plans require you to pay off the balance within a few months of separation or risk defaulting on the outstanding balance.

So is it a good idea to use retirement assets to purchase a home?

That depends. If you plan on using the equity in your home as supplemental income in retirement, some investors may consider this a good way of diversifying your retirement portfolio. However, if you have trouble making payments on the loan, not only could you end up losing your place to live, but you may also jeopardize part of your retirement nest egg. Read this Forbes article for more things to consider and like with all financial decisions, you should weigh your options carefully before deciding which approach to take.

 

3 Common Home Buying Mistakes You Probably Haven’t Thought Of

June 13, 2017

When the real estate market is hot like it is right now, I can’t help but compare it to “whack-a-mole” — as soon as a listing goes up (or in some places, even before), it seems like it’s sold. I can’t help but think of buyers who often have to make a buying decision within hours of touring a new listing or risk missing their chance to “whack” and score their dream home.

When preparing to shop for a new home, most people do a great job following the general financial guidance such as:

  • Reviewing their credit scores,
  • Paying off high interest credit card debt;
  • Saving 20% for a down payment; and
  • Coming up with a budget to spend only 25%- 35% of their monthly take home pay on housing (this includes mortgage, interest, taxes, HOA fees AND insurance).

But when the market hits “whack-a-mole” status, I’ve found that few people give much thought beyond the basics. Digging into my own, “don’t ask me how I know,” file, here are three more considerations that buyers should keep in mind as they shop, no matter how hot the market is:

  1. Think about selling before you buy. Unless you are 100% certain that this is your “forever home,” consider your future buyers before making an offer. One of the biggest mistakes I made when I bought my first home was that I failed to consider how “sellable” my home would be if I wanted to move in the future. Several years later when I did move, I had a hard time selling because I owned in a struggling school district, which eliminated parents as potential buyers, as well as others who knew that a school district could make or break your ability to re-sell. Before you make an offer, do some quick research on the neighborhood and school district so that when you decide to move, you’ll be able to cast the widest net and capture as many potential buyers as possible.
  2. Shop around for everything. If my #1 mistake was not considering a future move, a close second was not shopping for all of the products and services I would need in the home-buying process. My Realtor was not bad, but I relied on her for everything, including finding a mortgage. When I reviewed my mortgage options after the fact, I realized that I could have gotten a much lower interest rate. I also realized that I paid too much for my appraiser, home inspector and even my homeowner’s insurance and Realtor’s commissions. (I still #FeelLikeASucker) Do not make my mistake – no matter how awesome your Realtor is, ask about her commissions. Shop for mortgage rates and compare your options.
  3. Buffer your budget. No matter how many websites you read about homeownership, some expenses are going to catch you off guard. For instance, I grossly underestimated utilities. I created my budget using the average my Realtor gave me, not realizing that it was an average or really what that meant. So when I moved in record cold temperatures in January, my gas bill was much higher than average. My moving expenses were also slightly higher than I expected, and I failed to factor in the fact that I was paying the final utility bills for my old apartment, while also paying utilities for my new home. To avoid becoming house poor in your first month, make sure you add an extra 10%-20% to your first couple months’ planned spending to account for the unexpected.

Following the guidance above may take some extra time, but trust me, it will pay off in spades and your dream of home ownership won’t turn into a cautionary tale.

Your Financial Check-Up (Week 3): Achieve Your Most Important Financial Life Goals

June 08, 2015

It is week 3 of the Financial Check-Up Challenge and I’ve heard from readers who are participating in the challenge. I’ve also heard from others who basically told me, “I get it Scott. It’s important to check in occasionally to assess our financial health but LIFE HAPPENED and I didn’t get a chance.” Continue reading “Your Financial Check-Up (Week 3): Achieve Your Most Important Financial Life Goals”

Lessons Learned From A Home Ownership Dream Gone Sour

February 17, 2015

Recently, I was talking to a friend and she told me that she was selling her home because her American Dream of Home Ownership has become an American Horror Story. She then sighed and said if only she can go back and advise her former self. I asked her what she would say and she began sharing her lessons learned. Continue reading “Lessons Learned From A Home Ownership Dream Gone Sour”

To Buy or Not to Buy

July 18, 2013

I was reflecting on my “best investment decision” from my post last week and realized that the same caution that led me to not buy a home at the top of the real estate bubble also made me miss buying  a home near the bottom of the real estate market last year. I looked at several properties that I liked and they were priced low enough that I could have easily more than covered the monthly costs by renting them out if I had to. However, there were so many good options that I suffered from “analysis paralysis” and ended up not buying any of them. Continue reading “To Buy or Not to Buy”

A Financial Yardstick for Everyone

March 27, 2013

One thing I’ve come to learn after being on the financial helpline for 6.5 years is that some employees simply want to know how they are doing relative to everyone else.  No matter how I try to encourage them to consider themselves and their circumstances unique, human nature drives us to want to know if we are ahead, behind, or in line with our peers.  We crave some type of yardstick to know if we are measuring up.  Continue reading “A Financial Yardstick for Everyone”

How to Qualify For a Mortgage

December 05, 2012

Susan and I purchased our first home back in 1996. Like many newlyweds, our first home is what you might call a starter home.  It was a modest, two-story, single family home on a small piece of property at the end of a cul-de-sac.  After seven years (and three kids), we were ready to move on, and so we did. Continue reading “How to Qualify For a Mortgage”

Is it the Right Time to Buy a Home?

June 21, 2012

With both home prices and mortgage rates still near historic lows, is now the right to buy a home? That’s a question many would-be first time home buyers are asking themselves, myself included. For most of the first few years of my career, I was working on a full-commission basis and my unstable income and need to maintain a large savings account balance made me reluctant to commit to the upfront costs and monthly mortgage payments associated with home ownership. By the time my income was more stable, I was living in NYC, where buying just didn’t make sense to me, and then I was in law school with barely any income at all. As a result, I missed both the rise and the collapse of the real estate bubble. Continue reading “Is it the Right Time to Buy a Home?”

A Tale of Two Choices

May 25, 2012

Over the last few weeks, I have met a couple of young men who are in the early stages of their career.  Both are in their mid-20’s and both make approximately the same amount of money, yet each had very different financial issues to discuss.  The contrast with these two gentlemen is something that I am absolutely going to point out to my kids and hope that they can take a valuable life lesson from it. Continue reading “A Tale of Two Choices”

Financial Lessons From 17 Years of Marriage

May 16, 2012

On Sunday, I sat next to a guy on the plane who was heading to Las Vegas for his honeymoon. Now why I was sitting next to him and not his wife I’ll explain in a moment, but I love meeting young couples that have decided to tie the knot and embark on what I consider one of the greatest journeys known to man. I learned that he and his spouse had actually been married for a year, but this was the first time the two of them were able to get away. The fact that the trip was planned at the last minute because of their busy schedules explains the separation in seats, so I insisted on trading seats with his wife so that the two of them would be together (which landed me in the exit row – sweet!). As I sat back in 9C, I began thinking about how this would probably be one of a thousand challenges they would face together, both financially and non-financially, as a couple. Continue reading “Financial Lessons From 17 Years of Marriage”

GUEST BLOG POST: We’re All Human: Even Financial Planners Make Mistakes

September 29, 2011

You’ve no doubt heard of shoemaker’s children without shoes.  But have you ever heard of a financial planner not heeding their own advice?

We are all human and we all make mistakes.  Even when we don’t take the advice we give others.  So, I admit it.  I have been that same “shoeless” financial planner.  Continue reading “GUEST BLOG POST: We’re All Human: Even Financial Planners Make Mistakes”

Should I Rent or Buy?

April 14, 2011

For those of you who follow my recent posts, you are probably aware that my wife and I are re-locating to another state; in fact as I write this the movers are boxing up our possessions and will be loading up the moving van tomorrow.  Well I have to tell you, there is finality when you see your worldly goods packed in boxes by strangers!  What isn’t final (yet) is where my wife and I are going to call our new home. Continue reading “Should I Rent or Buy?”