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Using retirement money for a house

Financial experts universally frown upon withdrawing retirement money for anything short of an emergency, and this includes buying a house. However, there might be circumstances that justify using some of your retirement savings for a home purchase. For example, if you come upon a great deal and don’t have access to a down payment. You can tap your for up to $10,000 without penalty or tax for the purchase or remodel of a first home. The same leniency doesn’t apply to 401(k)s. If you pull money before age 59½ from your 401(k), with a , you’ll be assessed a 10 percent early-withdrawal penalty on the amount you withdraw and you’ll have to pay income taxes on that money. Using 401(k) funds is clearly a last-ditch solution for coming up with down-payment money. You may, however, be able to to buy a house. The IRS allows someone to borrow up to 50 percent of their vested account balance or $50,000, whichever is less, for a primary residence purchase.

Short-term savings options

If you plan to buy a house within five years or less, then you probably don’t want to save your house money in something volatile like the stock market. While stocks have generally performed well over the past five years, they’ve seen some along the way, such as during the onset of the COVID-19 pandemic and most of 2022 as investors grapple with . The stock market is for people who can keep their money invested over the long term, which is a minimum of about 10 years, Shaps says. For short-term savers, FDIC-insured products are best. There are several investment options to choose from if you’re saving for short-term goals. Here are some to consider: : These savings accounts at online banks earn higher rates of interest than traditional savings accounts and are still FDIC-insured. Money-market funds: A is another improvement over what you’ll get from most checking or savings accounts, but these funds aren’t FDIC-insured. : A certificate of deposit, or CD, invests in short-term securities to earn you more than you would from a typical savings account. Be sure to understand how long your money will be tied up in the CD before committing funds. CDs are FDIC-insured. Treasuries: are issued by the federal government and are generally considered risk-free when it comes to credit risk. However, your investment could still lose value if interest rates rise or the fail to keep up with inflation.

Look at low down-payment loans

Consider how you plan to finance that new home. You can finance it with as little as 3.5 percent down with a Federal Housing Administration, or FHA, loan. Other low or no down payment options exist through Fannie Mae, Freddie Mac, Veterans Administration, and the USDA Rural Development Program. While there are costs associated with this type of financing — including mortgage insurance premiums (PMI) — you can balance those costs against the potential for rising home prices and mortgage interest rates. Compare the options available with the costs of conventional financing. You may decide it’s worth it to go with a low down payment program and get into your first home sooner, rather than saving up for a 10 percent to 20 percent down payment.

Bottom line

While most people would like to buy a home sooner rather than later, putting off investing for retirement is not likely to serve you well in the long run. Consider reducing your contributions to retirement accounts while you’re saving for a house, but be sure to contribute enough to still get your employer’s full match. You can also make short-term investments to help your savings grow faster or look at loan options that don’t require high down payments. — Bankrate’s contributed to an update of this story. SHARE: Natalie Campisi is a former mortgage reporter at Bankrate. Brian Beers is the managing editor for the Wealth team at Bankrate. He oversees editorial coverage of banking, investing, the economy and all things money.

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