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Should You Use Retirement Funds to Purchase a Home?

A recent survey shows that some millennials are using their retirement funds to finance down payments on homes. Is this a bad idea?

Millennials using retirement funds to finance the down payment for a home isn’t a bad idea, but it may not be the best idea for everyone in the group. Buying a home, whether it is your primary residence or investment property, is a good thing. On one hand, owning your own home provides a level of stability and comfort for many in the age bracket. On the other hand using the funds for an investment property could have tremendous upside.

Short and long-term consequences

The short-term consequences of using retirement funds to finance the down payment of your home is the potential tax exposure and the obvious reduction in value of the retirement account. The funds that are withdrawn from a retirement fund will be considered income and will factor into the account holder’s tax calculation for the year these funds are withdrawn. This can cause an unexpected expense during tax time for the new homeowner. My advice—before making the decision, it would be wise to consult with a tax professional to measure the impact of this move and to be prepared. There are some exceptions to this. Speak with a tax adviser.

I believe there are long-term consequences of withdrawing funds from your retirement account. One such consequence is that you don’t want to continue to withdraw from your retirement account for every situation. One withdrawal may lead to another, then another. Remember, it’s a retirement account!

Are there any potential upsides?

There is a potential upside to using your retirement funds. You may want to invest in an income- producing asset outside of your retirement account. One may want to use part of their retirement funds through a self directed IRA vehicle partnered through an LLC to purchase real estate or a business. Thus the funds from these investments could assist in the account holder’s wealth building process. I do advice that this is risky and should not be done into without sufficient professional review.

If you go this route, how should you go about replenishing your retirement back to its original level?  Is that even possible?

There are two things that the account holder should hope for and one thing they should do. First, if possible, the account older should aggressively put money into their retirement account once the down payment is withdrawn and the home is purchased. Then the account holder should hope that the market trends up during the replenishment of their retirement account and that the home over that time increases in value.

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About Frederick Towles

Frederick Towles is an entrepreneur, author and professional coach on personal finance, recognizing, seizing and leveraging opportunities of all kinds. Frederick founded The Towles Group Inc. to address issues that relate to small businesses and individuals – accounting, taxation, asset protection, financial compliance, wealth creation, debt management and business management. He also founded Unlimited Expectations Inc. which provides tools for individuals to assist them in the areas of opportunity recognition, leadership and personal finance. Through the tools and services offered by these companies people are positioned to operate their lives and their businesses at optimal capacity.

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