If you’re planning to buy a home, you may be worried if you’ll have enough money saved for a down payment. You’ve probably heard that you can use retirement funds to help, but it’s important to know the restrictions, or you could be stuck paying penalties and taxes. And even though a home can be a great investment, taking out retirement funds early could hurt your long-term security.
Here’s what you should know before you make any financial moves.
Explore Other Options First
While borrowing from your retirement is one way to get into a home quicker, it may be better to find ways to boost your savings and shop for home loans featuring smaller down payments. If you need help getting on track with saving, our Home Advantage Program pairs you with an experienced SchoolsFirst FCU loan consultant and participating real estate agent who will guide you every step of the way through the home-buying process. It features the My Home Savings solution, which allows you to earn more dividends on the money you save for a down payment.1
If you borrow from retirement savings, here are the details of how it may affect your finances.
Borrowing from a 401(k), 403(b) or 457 Plan
Withdrawing money from a 401 (k), 403 (b) or 457 can cost you plenty if you don’t understand the restrictions. If you make any withdrawals before age 59 ½, you’ll pay a 10% early withdrawal penalty and be taxed on that money as well. Most plans will allow you to take out a loan, limited to $50,000, or half of your account balance, whichever is the lower amount. So for example, if you have $40,000 in your account, you can borrow $20,000. You are generally required to repay the loan – with interest – within a five-year period, but your employer may give you up to 15 years to repay if you are borrowing to buy a home. However, if you’re unable to make the payments, the balance owed becomes a distribution and you’ll pay the 10% penalty and taxes on the amount borrowed.
Using a Traditional IRA
If you’re a first-time homebuyer, the IRS allows you to withdraw $10,000 to use for a home purchase. If you’re a couple with separate IRAs, you can borrow $10,000 each. Keep in mind that you’ll pay income taxes on whatever amount you withdraw. If you don’t qualify as a first-time homebuyer and decide to withdraw the funds anyway, you’ll pay the 10% early withdrawal penalty and pay taxes on the amount you withdrew.
Using a Roth IRA
Because a Roth IRA uses after-tax contributions, your withdrawals of these contributions can be tax free as well, if you follow the rules. While you’re able to take out what you’ve invested, you can’t withdraw any earnings you’ve made on your investment until you are 59 ½ or older, unless you use a homebuyer exemption. The exemption allows you to withdraw earnings of up to $10,000 if you’ve had the account for more than five years. If you take out more than the allowed earnings amount, you’ll pay income taxes and the 10% early withdrawal penalty.
Loan Solutions That Make Financial Sense
At SchoolsFirst FCU, we know how important buying a home is. That’s why we’ve created home loan solutions with low down payments designed to help make the dream of homeownership achievable. Our home loan options include:
- First-Time Buyer’s Program
Our first-time buyer’s home loan features competitive interest rates, a low down payment — as low as 3% — as well as closing costs and minimal private mortgage insurance or PMI coverage that is lower than FHA loans, making it a smart solution for those who want to get into their first home but don’t have a lot of savings on hand.
- School Employee Mortgage Program
If you’re a school employee, we offer a mortgage loan featuring competitive rates and a fixed term.. This mortgage also offers discounted loan processing fees and no PMI, which can help you save money over the long term and reduce your monthly payments. The School Employee Mortgage program features a 5% down payment option.
- Adjustable Rate Mortgages
An adjustable rate mortgage offers a starting interest rate that’s lower than a fixed-rate mortgage at the beginning of the loan period. At the end of that timeframe – such as five or seven years – the interest rate will adjust up or down, depending on market conditions. Our ARMs feature down payments as low as 5%, a no PMI option and lender-paid closing costs – depending on the loan amount.
Need More Answers?
We offer homebuying workshops at a location near you.
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This article is for information purposes only. Please consult a qualified tax professional for tax advice on your specific situation.
Securities sold, advisory services are offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC, a registered broker/dealer and investment advisor. CBSI is under contract with SchoolsFirst FCU to make securities available to Members. Not NCUA/NCUSIF/FDIC insured, may lose value, no financial institution guarantee. Not a deposit of any financial institution. CUNA Brokerage Services, Inc. is a registered broker/dealer in all fifty states of the United States of America.
- Variable rate, subject to change daily at our discretion. Limited to existing Members who are participating in the Home Advantage Program; limit one per Membership. No early withdrawal penalty if full balance is used for home purchase. Partial withdrawals or withdrawals not used for home purchase are subject to an early withdrawal fee of $10, and closure of the share. Minimum deposit amount is $250. Additional deposits allowed to the maximum balance of $50,000. Certificate terms are available for 6, 12, or 24 months. See SchoolsFirst FCU’s Disclosure & Agreement of Terms and Conditions brochure for additional details about Share Savings Accounts.
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Extra Credit provides general information to help improve our Member’s financial lives. Every situation is different, so please contact us for guidance on your specific needs. The advice provided in Extra Credit is not intended to serve as a substitute for speaking to a loan representative, financial advisor, or BALANCE counselor who can help tailor a solution for you.
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