When retirement funds accumulate and grow, it can be tempting to use those funds for current purchases rather than for retirement expenses. In most instances, such expenditures would be deemed as foolish, although purchasing a home, with some qualifications, may be a wise move. Home equity not only affords an individual a choice of additional options for future finance and liquidity, but can also become a deadweight anchor if not budgeted and financed properly. Additionally, one must also weigh the risks of depleting retirement funds for a house that can eat up funds originally earmarked for travel, long term medical care, and other retirement plans.

Retirement Funds for a House?

 

A 60 year old Reddit poster wishes to purchase a $3 million house. In the course of doing research he decided to solicit additional opinions on Reddit as to the best way to finance it, as he is considering tapping retirement funds to pay for it. Apparently, the house is a good value for the asking price, and the window of opportunity is small. The poster wants the quick liquidity to close the purchase and plans to sell his current home within a year.

The poster sees the following options, and their corresponding downsides:

• Tapping his 401-K creates a tax liability at the highest bracket.
• Assets in 401-K will subject his heirs to taxes upon inheritance, after his demise.
• Tapping his standard investment brokerage account will only get socked with capital gains taxes; no liabilities for his heirs.
• Taking out a mortgage at currently high interest rates.

As the poster is over the age of 59 ½, he would not be subject to the 10% early withdrawal rule, so the strategy at hand is to figure out the most efficient use of funds to minimize taxes vs. interest charges and maximize bang for the buck.  

Potential Course of Action: Pros, Cons and Taxes

The poster’s biggest risk is that depleting retirement funds early on for buying the house puts his future retirement funding plans into jeopardy. Taxes that are due on withdrawals will inevitably be at the top of his bracket, as he is presumably at his highest earning level at present. 

Clearly, a financial advisor who is privy to all of the specific details pertaining to the 401-K, investment account, the current home and the prospective house for purchase should be consulted. Aside from the house purchase, other considerations need to be reviewed to gauge a total cost outlay that may be required:

• What are the associated title transfer, legal, broker, and any other fees that the purchase entails?
• Are there outstanding liens, taxes, adjudications, or other financial liabilities or disputes associated with the property? (This research is part of what the legal fees should cover.)
• What would the remodeling or repair cost estimates be, if any?
•  If the poster thinks that a sale of his current home can be facilitated within 6 months, he may wish to look into citing a 1031 exchange on his taxes to ensure that capital gains taxes on his sale are waived due to another real estate purchase of a ballpark nominal equivalent residence.
• What would the carrying costs (taxes, utilities, etc.) run for the duration of time the poster owns both properties?

Take a 401-K Loan (for down payment)

Since the need for the funds is for a presumably short duration of a year, the outstanding funds from the sale of the current home would be available to replace the outlay. As such, my first suggestion would be to coordinate with the employer about getting a 401-K loan, provided the plan has a loan provision. A 401-K loan’s advantages include:

• Minimal to zero credit check, underwriting, or credit application wait times.
• Lower interest rates than unsecured loans.
• Liquidity in only 4-5 business days, on average.

Prompt repayment of the loan should not cause a severe impact on the overall 401-K account growth trajectory. Once the down payment funds are in hand, a floating rate mortgage with no early payment penalty should be taken out to close on the property, provided all of the above issues have been satisfactorily addressed and budgeted. Interest rate volatility should not be a significant risk if the bulk of the balance can be paid off in a year. 

If a 401-K loan cannot be facilitated and tapping retirement funds is still the only option, then Roth IRA account funds, which have already been taxed, should comprise the bulk of the down payment and any tax-deferred funds should be withdrawn as minimally as needed. 

This article is intended to be solely for informational purposes. Professional tax and retirement fund experts should be consulted for any specific needs. 

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