You can imagine what it’s like to hold the keys to your new house in your hand — but you’re just not sure how to get there.
When you’re scraping together all you have for your 20 percent down payment for your first home, any break you can find is helpful. There’s good news. Whether it’s finding a tax advantage or money you had not considered using, there are ways of getting closer to your goal of home ownership.
First-time home buyers often struggle financially before making the major move from renting to owning. They may tap into their basic savings account, but overlook money they’ve put aside in retirement accounts.
If you’ve reserved money in an Individual Retirement Account (IRA), 401(k) or annuity, you may be closer to becoming a homeowner than you think. Here are some fast track tips for gaining access to the money you thought was locked away.
Take distributions from traditional or Roth IRAs
Some of us have IRAs tucked away and quietly earning interest while we are working hard and planning decades away. We almost forget about it. The rules associated with these accounts keep us from touching the money early and facing penalties. Fortunately, purchasing your first home is one scenario where the Internal Revenue Service (IRS) will make an exception.
You can take up to $10,000 of your IRA for qualified acquisition costs on your home without paying the 10 percent excise tax you would normally pay for early withdrawals made when under the age of 59 ½. The IRS does require the money be used for house expenses within 120 days or it becomes a nonqualified distribution.
Plan ahead for the additional income tax you will owe for taking the distribution from a traditional IRA. If you are withdrawing from a Roth IRA and the amount you need is not greater than your principal, you will not owe income tax.
Taking distributions from IRAs early is not the solution for everyone. When money is taken from these accounts, you are decreasing the principal amount that can earn interest and grow with tax advantages. While purchasing a home is a major priority, make sure you do not lose sight of your retirement planning.
Borrow from your 401(k)
Your employer may allow you to permanently withdraw funds or borrow from your 401(k). Financial experts recommend borrowing rather than withdrawing, as the first option will not trigger any extra taxes or penalties. You may borrow up to half of your vested balance or $50,000 — whichever is less.
Repaying this amount may take time, but it comes with some advantages. You will owe interest, but this will be money you are paying to your own account, rather than to an outside lender. Also, some employers allow for 15 year repayment plans.
For those who have already borrowed from their 401(k), there is still the option to take a hardship withdrawal from the account, but this will mean paying penalties.
Certain risks accompany borrowing from your 401(k). If you change jobs, either as a result of a layoff, getting fired or deciding to work somewhere else, you will have to repay this loan immediately. To help offset that risk, put together a long-term plan to rebuild your savings and only pursue this option if you are comfortable with your level of job security.
Use annuity funds
Another retirement savings vehicle is your annuity, if you have one. While it is likely that you will still owe the 10 percent early withdrawal penalty, this route can get you one step closer to owning your new home.
If you only need a small sum to make your down payment, you may be able to withdraw cash without paying high fees to the annuity insurance company. Need a larger amount? You can consider selling your annuity payments to a third party annuity purchaser.
Withdrawing or selling annuity payments can get you money quickly, but you will have to pay fees for accessing the money early.
Take the time to evaluate your full financial portfolio before committing to any one of these choices. You need to be aware of the opportunity cost, which may lose you potential stock gains or interest earnings. Look carefully at your goals, limitations and timeline for retirement.
You also may want to wait a few years to save before purchasing a home or deciding that utilizing retirement savings is a trade-off you are willing to take to get those keys in your hand.
Alanna Ritchie has spent years studying, writing and learning to love the intricacies of the English language. Today, she works as a content writer for Annuity.org, where her primary focus is personal wealth management.
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