If you are thinking about buying a home and aren’t sure how to cover your down payment, you are not alone. Many people thinking about buying a home don’t have tons of money to put towards a down payment, but you might have not explored all your options. It’s possible to take money out of your 401k or IRA to cover your down payment.

Using Your 401k

If you have been working for years and years, you may have a decent amount of money saved up in your 401k. You will face a penalty if you choose to take money out of your 401k and you will also have to pay taxes on that money. If you’re able to move the money to an IRA, that is a good option to avoid paying taxes on it once taken out of the 401k.

You can also take out a loan against your 401k. The amount of the loan can be up to $50,000 or half the amount of the account. You do have to pay back the loan even though it’s your own money as well as interest, but you don’t have to pay taxes or penalties.

If you choose to go this route, it’s important to think about what that means for your future financially. If you are borrowing a sizeable amount, keep in mind the payments will be large as most loans extend five years. Also, if you happen to leave your company, you may be required to pay back the outstanding balance of the loan.

Using Your IRA

You can also withdraw funds for your down payment from your IRA. If you choose to go this route, the limit is $10,000 and you can take it out with paying penalties. There are some limits that can some when it comes to withdrawing funds from your IRA when it comes to the time you have to use it. If you are choosing to use funds from your IRA for a down payment or a repair, you have to make sure it’s paid within 120 days or you will face a 10% penalty.

However, if you are using the funds to purchase a home for a spouse or family member, you can withdraw the funds without paying any penalties. A good thing about using funds from your IRA is that your spouse can also withdraw funds so you can have a combined $20,000 since the limit is per person.

Is It Right For Me?

The decision to withdraw funds from your 401k or IRA for a down payment for even for a repair is one you should think about long and hard before committing to it. As with any major financial situation, you should speak with your spouse, accountant and anyone else involved in your finances. Another important thing you should consider is the amount of financing you will qualify for as the down payment is typically a percentage of that amount and if the house you want requires a larger down payment, you may not have the funds needed to cover the down payment.

Contact Us Today!

If you are in the market to purchase a home and have concerns about funding the down payment, we can discuss your options and figure out if this option is the best way to go. Don’t hesitate to reach out today!

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