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Should You Use Your Retirement Savings To Buy A Home?

First-time home-buyers are often surprised by the requirements of obtaining a mortgage, especially when it comes to the down payment. For existing homeowners like me, coming up with a 20% down payment usually starts with selling the home I’m in right now and using the equity to make a down payment on my next home. Interestingly enough, you don’t actually have to be buying a home for the first time in your life to be considered a “first-time” home buyer. Using your IRA Most people know that when you take money out of a traditional IRA prior to age 59½, there is usually a 10% penalty for early withdrawal. However, the IRS offers an exception that allows you to withdraw up to $10,000 over a lifetime without penalty for first-time home purchases. If you’ve owned a Roth IRA for at least five years, any distributions used for a first-time home purchase (subject to the $10,000 lifetime limit) are treated as qualified distributions. If you have not owned a Roth IRA for at least five years, your distribution may still avoid penalties but some or all of it may be subject to income taxes. How to use more than $10,000 from your Roth IRA One thing you should understand is that any money you put into Roth IRAs comes out first and is not subject to taxes or penalties. The only way to withdraw money from your employer-sponsored retirement plan (e.g. 401(k)) for a home purchase while you are working and under age 59 1/2 is through a hardship withdrawal. Using a plan loan instead Some people use the 401(k) loan provision to access those funds to buy a home without the tax.