“I want to buy a house, but I just don’t have the cash for the downpayment.”
This phrase is a familiar tune that people hear around the world. However, there are some innovative ways to get access to cash you probably didn’t know you had that I wanted to share with you today!
Glossary – The IRS’s definition of a first time home-buyer/purchase is that you, or your spouse, has not owned a principal residence in the past two years. You don’t actually have to be buying your first house. Awesome!
For first time home-purchases, the IRS allows you to tap in to two retirement resources of yours at an early age, without penalty: Your IRA(s) and 401k retirement accounts.
So, let’s look at the all-important details that you will need to know to access these funds to buy your first house.
Cash from your 401k Retirement Fund
As stated previously, the government allows people to withdraw money from their 401k account to buy a first-time residence. This cash will be given in the form of a loan to yourself. Generally, the loan must be paid back over five years, although this can be extended for a home purchase. You are usually allowed to borrow up to 50% of your vested account balance to a maximum of $50,000.
Additionally, loan payments can be deducted from payroll checks (another added benefit). While interest rates vary by plan, the rate most often used is what is termed the “prime rate” plus one percent. The current prime rate is 3.25%, meaning that an estimate for the current interest rate you would pay on the 401k loan is 4.25%. Again, you have to remember that this is a loan to yourself, and therefore, the interest you pay is to yourself as well!
Another great thing is that money obtained from 401k loans are not subject to income tax or the 10% early withdrawal penalty, unless you stop your employment with your 401k employer.
See the link below for a great list of pros and cons to mull through before taking out a 401k loan.
Get a Loan from Your 401k
Cash from Your IRA (Individual Retirement Account)
According to Bankrate.com (Using IRA’s for Home Buying), both Roth IRAs and Traditional IRAs can be used for homepurchase expenses. However, they are treated a little differently. So, let’s address the stipulations for each individually.
With Roth IRAs, the IRS rules dictate that you can withdraw up to $10,000 from your account for first time home-purchases, provided that you have had the Roth IRA account open for a minimum of 5 years.
Hint – this is another benefit that can be created by getting your children to invest early!
If you meet these qualifications, the $10,000 will be tax and penalty free.
For Traditional IRA’s, each individual can withdraw up to $10,000 towards the purchase of that “first-home” tax and penalty free. However, the IRS’s rules are even more lenient for Traditional IRAs. The IRS says the “first-time homebuyer” using your IRA funds for a down payment can be you, your spouse, one of your children, a grandchild, or a parent.
Just be careful about the timing of withdrawing the funds. If the funds are not used for an eligible home expense within 120 days, taxes and penalties will apply.
What are eligible expenses?
Turns out, you can use the funds from your IRA for more than the downpayment; you can also use them for closing costs, financing costs, settlement costs, and construction costs.
So, all in all, it turns out that Uncle Sam does want us to own our own houses after all!
Keep on learning!
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