| Perhaps one of the most popular, yet also most unanswerable, questions in the world of finance right now is “should I be looking to buy a house anytime soon?” The cost of buying a home has ballooned massively over the last couple of years, causing some to wonder if an overall market decline is past due. Other eager buyers are also exploring alternative financing options to pull off a purchase, maybe even tapping into their retirement savings. Methods to do so - Your Roth IRA: If you’re thinking of going this route, the best-case scenario is if you’ve got an existing Roth IRA with a healthy balance. With a Roth IRA, you can withdraw the contributions you’ve made into the account penalty-free at any time, and for any reason, as long as you’ve had the account opened for at least 5+ years. Why? Because it’s money you’ve already paid taxes on. The additional nuance here is that first-time home buyers can also take out up to $10,000 of investment earnings penalty-free before you’re 59.5 years old as long as the account is 5+ years old. The IRS considers a first-time home buyer someone who hasn’t owned a home for the last two years.
- A traditional IRA: If you withdraw money from your traditional IRA before age 59 1/2, you’ll usually have to pay the 10% penalty on the withdrawn amount. A first-time home buyer can withdraw up to $10,000 from their IRA penalty-free. The $10K exemption is available for individuals, meaning married couples can withdraw $10K each for a total of $20K towards their first home.
- 401K options: What makes the 401k unique here is that instead of withdrawing, you can take out a loan against the balance up to $50k or 50% of the account, whichever is less, and pay the interest rate on the loan back to yourself. This isn’t ideal, and loan periods tend to be short (less than 5 years) which can result in hefty payments. Withdrawals, on the other hand, are not afforded the same penalty or tax exemption luxuries that IRAs get, meaning any withdrawal made for a home purchase would be quickly eroded by those fees.
A sober look at using retirement to fund a home purchase Using some of your future to finance a home purchase sounds risky, and without context, it is. However, there might be a few instances where this may be a reasonable route to take. You’re young: If you’re in your 20s or 30s and looking to buy a home, it might not hurt to take some extra funds out of retirement to buy a home, especially if you’ve already been investing consistently. A home can be a good investment, and so it’s likely you’ll make that loss up in the value and appreciation a home provides. You’re avoiding private mortgage insurance (PMI): If you don’t quite have enough of a down payment (20% of the loan) to avoid paying for private mortgage insurance, pulling out a little retirement money to get over that hump might be wise. PMI ranges from 0.5%-2% on average, and so dodging this could end up saving you thousands per year. But in other cases, it may be better to think twice: You’re older: Depending on how much you’ve saved for retirement, pulling out some of those savings could jeopardize your ability to retire if it’s getting late in the game. This is heavily situational though, and depends a lot on the rest of your finances and living situation. Your balance is low: If, for example, you’ve only saved $10,000 for retirement in your Roth IRA and you’re considering pulling it all out for that first-time homebuyer exemption, you should also first consider the fact that you’re depleting the entire account value, and weigh any other options before doing so. | 
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