It’s frustrating to long to own a Southern Maryland home but be faced with the very real fact that your bank account is just a bit on the skimpy side. News stories about shrinking home inventories and multiple-offer situations are abundant, so there are obviously lots of other people who are able to realize the dream of home ownership.
You’re probably wondering, “What’s wrong with me?”
According to a GO BankingRates study, 69 percent of Americans have less than $1,000 in a savings account. Sadly, 34 percent have nothing saved. The answer to your question, then, is that nothing is wrong with you. You’re among the millions of Americans who, for whatever reason, haven’t saved for the future.
That’s little consolation when you want to say goodbye to your landlord and get into a home of your own. But if consolation is what you’re looking for, you’re in luck. We have some to give. There are several ways you can get your hands on the money you’ll need a closing when you buy a home. From second loans to outright grants, government programs abound.
But if you’ve tried those with no luck, consider using the funds in your retirement account.
Mixed advice from financial professionals
Many financial pros will say that we’re crazy for recommending this strategy, which is why we will always remind you that we aren’t financial experts. You should speak with your financial expert before seriously entertaining using your retirement funds to buy a house.
That said, there are some who will wholeheartedly agree with the concept. “Right now, affordable prices and low interest rates offer an unusual opportunity to buy a home, so we do sometimes recommend that our clients borrow against their retirement. Owning a home is an important way to build financial security,” Ben Barzideh, a wealth adviser at Piershale Financial Group Inc. in Illinois, tells bankrate.com’s Michele Lerner.
Most agree, however, that this strategy works best for younger homebuyers who have many, many years to rebuild their retirement nest eggs.
Using your 401(k)
Retirement plans don’t have to allow loans, but 80 percent of employer-sponsored 401(k) plans do let their participants to borrow against their savings, according to the Employee Benefit Research Institute. The first step is to find out if your plan is among those that do.
Then, learn what restrictions the employer places on these loans. “Employers can limit the amount that can be borrowed and they can have their own rules around loans,” Hattie Greenan, director of research and communications for Plan Sponsor Council of America, tells the Washington Post’s Jill Chodorov Kaminsky.
“They can limit the number of loans per year, put a percentage of assets cap on it, as well as set the interest rates,” Greenan continues.
The beauty of borrowing against your 401(k) is that there is no bank involved, so therefore no credit check, making it quicker to get your hands on your cash. Your lender will like this as well because a credit pull will ding your credit score.
One of the biggest downsides to using funds from your 401(k) happens if you find you can’t repay the loan according to the terms you agreed to. The outstanding balance will be reported to the IRS as a distribution, and you’ll have to report it as income. “You must include this amount in your gross income in the year in which the distribution occurs,” Kaminsky cautions. You may also be taxed an additional amount, depending upon your age.
Be aware as well that most employers will demand repayment either immediately or within 60 days of a separation – whether you voluntarily quit, are fired, or get laid off.
Raid your IRA
Funds in both the traditional and Roth IRA can be used to help you purchase a home. This strategy differs from using the 401(k) because the IRS forbids loans from an IRA – you must take a disbursement.
The good news is that even if you haven’t reached the golden age of 59 ½ years of age, you can still avoid the IRA 10 percent early withdrawal penalty. The bad news is that you may still be dinged for taxes on the withdrawal if you have a traditional IRA. You already paid taxes on your Roth IRA funds, so that disbursement won’t trigger the IRS’ itchy fingers, as long as the account has been open for at least five years.
It’s a bit more complicated than this, however. With a Roth IRA, for instance, you’ll need to be careful to use only contribution money, not earnings.
Again, there’s a lot to learn about using your IRA to fund your down payment and closing costs, and only a financial professional can adequately counsel you.
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