A soaring stock market (until very recently, that is). Low mortgage interest rates. A booming housing market.
Given that convergence, is it any wonder some prospective homebuyers are wondering if they should tap their retirement accounts to help raise their home down payments? Elevated retirement account balances are likely to be especially tempting sources of cash for first-time buyers who need down payments, since they won’t have home-sale proceeds to apply to their new purchases. The tax code also makes special provisions for some types of retirement-portfolio withdrawals to pay for first-time home purchases.
In an ideal world you’d fund a home purchase with non-retirement assets–money held in a taxable brokerage account, for example. Raiding a retirement account to pay for a home could even be considered a red flag that you’re buying more home than you can afford. As consumer advocate Clark Howard recently pointed out, the home down payment is just the tip of the iceberg in housing-related outlays for homeowners. After signing on the dotted line (and signing again, and again), home-improvement, repair, and maintenance expenses are sure to follow. If putting together a down payment is a strain, you may well be better off waiting until your budget has more padding to buy a home. Yes, rising interest rates are threatening, but rising rates often keep a lid on home prices because they tend to depress demand.
If you’ve decided to tap a portion of your retirement account to help boost your down payment, know that some ways of doing so will be better than others. Here’s a rundown of them by account type, ranked from the least bad to very worst options.
A Roth IRA is mainly a retirement savings vehicle. But if you need extra for a home down payment, a Roth IRA should be your first stop. That’s because you can withdraw your own contributions (no investment earnings) for any reason without incurring taxes or penalties. You already paid taxes on those contributions, so if you’re withdrawing them you won’t need to pay taxes again.
Withdrawing the investment earnings component of a Roth IRA carries more strictures than withdrawing your contributions, and that’s especially true if you’re younger than 59 1/2. However, if you’ve had the money in the Roth IRA for five years or more but you’re not yet 59 1/2, you can tap the investment-gain piece …….