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We have about $ X in the bank, of which $ 80 % is in your typical retiremernt accounts. 401k, Mutual Funds, etc.
We have been looking at homes to buy in FL, foreclosures, etc. We have seen several deals in the $ 80-100k range for some great homes in great areas. My concern is my personal credit due to a recent "being taken advantage of in business" and having to file personal bankruptcy a few years back. I simply may not be able to get a mortgage.
Making the assumption that we/I cannot get a mortgage, is it wise to tap into your retirement accounts to pay for a home in full? An 80k Mortgage over 15 years will cost us $ 40k +/- in interest.
The general public always says "Dont tap your retirement account" to pay credit cards off, etc. However, we are trading equity for equity and ( in theory ), that equity should increase and be worth more in 30-40 years when we want to retire or even if we sell the house in 10 years.
I know there are tax penalties that I have to look into, but I was not sure if that would be waived or decrased if you are using it to buy a home. In the end, does this make financial sense? Perhaps on a side option, does it make sense to take the money from the retirement account, pay for the home in full, and then get ( if possible ) an equity loan to replace the funds back into the retirement account. Aside a possible lower interest rate for a equity loan vs mortgage, is there an advantage to this idea?
Several answers here:
No, you should not liquidate your retirement funds unless it is a severe emergency.
Having said that, if you have an IRA, your question has a lot of merit. I'm not going into a long-winded explanation here - not appropriate - but there are plenty of people out there who use their IRA to buy Real Estate! You need a self-directed IRA and if you put down at least 30%, you can get a mortgage from specialized lenders; they lend based on the underlying property, not your "normal" mortgage qualifications. There are a number of things to take into consideration, obviously, but with your time frame, IMHO it's a great idea! Especially if you have a Roth
You can live in a house, you can't live in a retirement account. Personally if I had the money to buy a house that I was going to live in a long time with cash and it meant cashing in retirement funds to do so I would.
You can live in a house, you can't live in a retirement account. Personally if I had the money to buy a house that I was going to live in a long time with cash and it meant cashing in retirement funds to do so I would.
Disregarding for the moment the ramifications of eliminating your retirement funds (tough to live on Social Security), the penalty/costs of liquidation if you're under 59 1/2 eat up a lot of that money! First you're paying a 10% early withdrawal penalty and then you pay (Federal and State) income tax on the amount; depending on your tax bracket, that could leave you with 50% of the amount you had in the account. To use an example of $80,000 in the account; after taxes and penalty, the real net amount is $40,000 - requires serious thought, don't you agree?
On the other hand, many 401(k)s have a provision whereby you can borrow a government set amount for purposes of buying your primary residence, which you pay back over time (used to be $10,000 but may have increased somewhat). Of course you're now paying it back with interest and after-tax money
The general feeling here seems to be a NO, and that is my gut as well. However I am still open simply because of the math. We are talking about an 80k home that sold for $ 250 5 years ago.
Who cares what a house was worth 5 years ago. What matters is current value.
Quote:
Originally Posted by NHtoFL
Let me rephrase this original post question a certain way.... If we have no mortgage, we have extra income. If we pull from our retirement account, buy a house cash, and then pay what would be our mortgage payment toward a retirement account, would that make more sense in the long run? I dont want to severly kill our accounts with no plan to reinvest in ourselves. Now in 20 years we have home equity and a retirement account that should be back up to par.
How old are you? How long till you retire? Do you have kids? Do you have college funds for them? Is your job secure?
Quote:
Originally Posted by NHtoFL
Hypothetical Situation
Right now I am paying $ 2100/month rent for a luxary condo. Even if we follow this plan and bank 1500/month, in theory we would of replenished the 80k purchase in 4-5 years. Hypothetically speaking, even if in 5 years the housing market cuts in half, now we have a home only worth 40k + 80k replenished in the bank. Our net worth is now 120k + existing assetts vs the 80k + existing assetts. We are worth 40k more and own a home
This is what I am looking at and considering. What am I missing here that may be a factor that needs to be considered?
When you talk about replenishing your retirement accounts how do you plan to go about? There is a limit to how much you can contribute to an IRA per year. So any money you save you will have to put in a regular account and pay taxes on the earnings every year.
Lets just do the numbers. The house you want to buy is 80k. Is the money you have in an IRA or a Roth IRA? If it is in a regular IRA you have to take 10% more out to cover the penalty. I am not sure how the penalty is applied but assuming it is added to the tax rate then for every dollar you take out you only receive 62c($1-10c(penalty)-28c(tax). To get 80k then you have to take out almost 130k. How long is going to take you to replenish that?
From a Roth you can only take out the contribution money which you already paid taxes on so it is more doable. And there is no penalty if used for the purchase of your first home.
On the other hand, many 401(k)s have a provision whereby you can borrow a government set amount for purposes of buying your primary residence, which you pay back over time (used to be $10,000 but may have increased somewhat). Of course you're now paying it back with interest and after-tax money
In this economy it is very dangerous to borrow from a 401k. Reason being is that if you loose your job the loan is payable at that time. If you don't pay it it is treated as a withdrawal and the taxes and penalty apply.
In this economy it is very dangerous to borrow from a 401k. Reason being is that if you loose your job the loan is payable at that time. If you don't pay it it is treated as a withdrawal and the taxes and penalty apply.
FYI, that was for informational purposes only - not a recommendation
Job security is pretty good. I am self employed and have been for 15 years. Yes the penalties are a concern and I need to look into that as this is just a recent thought. This is why I am asking all of these questions.
An 80 k repayment should take 4-5 years. 130k would be 7-8 years.
Job security is pretty good. I am self employed and have been for 15 years. Yes the penalties are a concern and I need to look into that as this is just a recent thought. This is why I am asking all of these questions.
An 80 k repayment should take 4-5 years. 130k would be 7-8 years.
There is no repayment. You can not put that kind of money into an IRA in such short time unless it is different for the self employed.
There is no repayment. You can not put that kind of money into an IRA in such short time unless it is different for the self employed.
You're right of course, there are annual contribution limits for IRAs, and withdrawals from 401(s)s have to be made according to the guidelines of the underlying plan (you'd have to read it carefully or ask HR--or do both ).
As a self-employed individual, you could have a SEP, and contribution limits are more substantial. Impossible to make a "real:" recommendation without knowing all the facts...
All the traditional 401K advice assumes that taxes won't go through the roof, and that the dollar will still be strong when you're ready to pull your money out.
I'm not counting on taxes staying this low for very long. States and cities are running out of money, and they'll be pushing hard to raise our taxes. Sooner or later the federal government will need to raise taxes too.
I'm also worried about what's going to happen to the value of the dollar when the treasury bubble starts to deflate. If I had to hazard a guess, I would say that people will rush out of the dollar just as fast as they rushed into it. If that happens, things could start to get expensive in a hurry.
If I were in the OP's position, I'd really think about taking the tax hit and buying a house...but I'd probably wait until late in the summer to see how much more the prices will drop.
Last edited by sterlinggirl; 04-09-2009 at 08:02 PM..
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