Can I use retirement funds to buy a second home?

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SmartAsset: Can You Use Retirement Funds to Buy a Second Home?

SmartAsset: Can You Use Retirement Funds to Buy a Second Home?

Can you use retirement funds to buy a second home? Technically yes. Pension funds are financed with your money. But perhaps a better question is, can you pull money out of your retirement fund early to buy a second home and avoid paying penalties? The answer is generally no, not before age 59 1/2. And even if your retirement fund allows you to buy a second home, that answer will be dictated by limitations and other factors. Here’s what you need to know.

A Financial Advisor can help you create a financial plan for your home purchase and retirement needs.

You can withdraw from a pension fund, but it depends

In general, it is not easy to withdraw money from a pension fund to buy a second home without being penalized with a 10% early withdrawal tax. Here’s a quick scorecard of how retirement funds work when you’re considering buying a second home:

  • IRAs. If you withdraw money early from a traditional IRA or a Roth IRA to use as a down payment on a second home, you will be subject to a 10% penalty. But it’s worth noting that you can withdraw up to $10,000 and use the money to buy, build or rebuild your first home without being subject to the tax penalty. Although you may have to pay income tax on that $10,000.

  • Self-directed IRAs. Here’s the one exception to withdrawing money from an IRA to buy a second home and avoid being burdened with taxes. If you have a… self-directed IRAyou can buy a second home with the money without penalty, but this is a complicated financial transaction. Your self-directed IRA will actually own the home, not you. And you can’t live in the second house. It would exist purely as an investment. It should also be noted that these funds can be used to purchase real estate, but not to build real estate. This is an investment that only sophisticated investors should attempt.

  • 401(k)s. As with IRAs, before age 59 1/2 you can’t withdraw money to move into a second home without incurring a 10% tax penalty. But what you could do is one 401(k) loan and use that money to build or buy a second home. You wouldn’t be affected by the tax penalty, nor would you have to pay taxes on what you take out, but you would repay the loan with interest. This really isn’t a bad thing in the long run: you’re paying for yourself and ensuring that your retirement funds will be there later.

In short, it can be difficult to withdraw money from a retirement fund to buy a second home without being penalized by the IRS.

Pension Fund Alternatives to Buying a Second Home

SmartAsset: Can You Use Retirement Funds to Buy a Second Home?

SmartAsset: Can You Use Retirement Funds to Buy a Second Home?

Instead of plundering your retirement funds to buy a second home, consider these three common strategies:

  • HELOC. If you have surplus value in your existing home, you can use a surplus credit line (HELOC) or an equity loan. But these can also have disadvantages. For example, if the interest rate is higher, borrowing home equity is more expensive than if the interest rate is lower.

  • Pay out refinance. Somewhat similar to a home equity loan or HELOC, this strategy would help you refinance your first home and take money out of the equity, which could be used for a down payment on a second home.

  • Partial or shared ownership. This strategy allows you to buy part of a property, such as a time share. There are plenty of pros and cons to consider first, but that kind of arrangement can come in handy for people who want a vacation home but don’t plan on living in the second home year-round.

It boils down

SmartAsset: Can You Use Retirement Funds to Buy a Second Home?

SmartAsset: Can You Use Retirement Funds to Buy a Second Home?

If you want to use retirement money to buy a second home, be aware of any restrictions and other implications for your retirement savings before making a withdrawal. It may be worth calculating how much money you would lose over time by taking an early withdrawal and comparing other alternatives to your financial plan.

Tips for investing in retirement

  • A Financial Advisor can customize your retirement plan to fit your investment needs and goals. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can interview your advisor matches for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.

  • If you want to know how much an investment can yield, SmartAsset’s free investment calculator can help you estimate.

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