What is the best way to get cash from my retirement accounts for a home down payment?

Question

So I am not sure the best way get cash for down payment on a house. Ideally I would like to make it 20% to avoid PMI. The purchase price on the house is going to be about 250k.

I have about

• 5k in my checking account
• 14k in a Roth IRA
• 26k in a IRA
• 26K in a brokerage account

What would be the best way to take out the money to avoid the most penalties and taxes?

Answer 1

You can withdraw the contributions you made to Roth IRA tax free. Any withdrawals from Roth IRA count first towards the contributions, then conversions, and only then towards the gains which are taxable.

You can also withdraw up to $10000 of the taxable portion penalty free (from either the Traditional IRA or the Roth IRA, or the combination of both) if it is applied towards the purchase of your first primary residence (i.e.: you don't own a place yet, and you're buying your first home, which will become your primary residence).

That said, however, I cannot see how you can buy a $250K house. You didn't say anything about your income, but just the cash needed for the down-payment will essentially leave you naked and broke. Consider what happens if you have an emergency, out of a job for a couple of months, or something else of that kind.

It is generally advised to have enough cash liquid savings to keep you afloat for at least half a year (including mortgage payments, necessities and whatever expenses you need to spend to get back on track - job searching, medical, moving, etc). It doesn't look like you're anywhere near that.

Remember, many bankruptcies are happening because of the cash-flow problem, not the actual ability to repay debts on the long run.

Answer 2

Given that utilizing all the funds available to you drains your retirement and leaves you with very little cushion for unforeseen events (as already noted), it may be best to use a smaller amount for closing and just deal with the PMI for a couple years. PMI is likely less than the taxes/penalties incurred from withdrawing a full 20% + closing costs. Let alone the lost earning on the accounts (above your mortgage interest rate); but personally I think the stability of significant home equity is worth more than anticipated stock gains.

I would recommend pulling enough to buy the house comfortably without dipping too deeply in any one area, while still paying down your balance to where you can eliminate PMI quickly (say 2-3 years). Your limits for each account are approximately:

• Roth IRAs:

  • Up to your total contribution amount - not taxed or penalized
  • Up to $10k (beyond contributions) for "first time" home - taxed but not penalized
  • Above contributions + $10K - taxed and penalized

• Traditional IRAs:

  • Up to $10K (for "first time" home) - taxed but not penalized
  • Above $10K - taxed and penalized

• Brokerage (non-retirement):

  • Up to balance - gains taxed but not penalized

• Checking:

  • Up to your account balance - not taxed or penalized

Things to consider:

• The brokerage account (presumably, since the type isn't specified) doesn't have the tax advantages of the retirement accounts, so long term that account is "worth less" because the gains aren't protected. I would pull from that account before retirement accounts.
• You mentioned that 2 of the retirement accounts (but not which ones) are inherited - you will have to start taking Required Minimum Distributions (RMDs) from those anyways the year after the death of the original owner. Since you will be taking that tax hit either way on RMDs, might as well use the funds to get into your house (and/or pay it down over the next few years).
• A home purchase is a one-time event (with long-term, ongoing payments); draining your retirement funds is fairly permanent. Committing these funds to your house will dramatically limit your options for other purchases/investments in the future. You can always pull the retirement money out later if you want to pay down your mortgage (e.g. for PMI elimination), but once funds are in the house you can only access them by borrowing against the home (refinance or HELOC) or selling.

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If you are current on your payments, you can request PMI removal once your loan-to-value drops below 80% - it also terminates automatically when it is scheduled to drop below 78% (not if it actually has). Many loans have a 2 year minimum PMI period though, regardless of your Loan To Value (LTV) changes. LTV changes could be from:

• Making additional payments on principal, from income or retirement withdrawals
• Your home value going up (as verified by a bank-ordered appraisal)
• Refinancing a reduced amount after a couple years (although financing costs are generally unlikely to outweigh the PMI savings unless you are also getting a much lower rate)

Answer 3

The best way to get cash from retirement is to not do it. Leave the retirement savings alone. Start saving for house down payment. Look for ways to squirrel away money for that down payment. Consider payment plus insurance, taxes, and maintenance costs. If all that comes in less than a rental, you're probably better off buying. Most likely it will not. Make sure that when you go to buy, you have 20% down, AND an emergency fund that will cover you for 3 months of expenses at the new, higher, rate. Hint, that'll probably be in excess of 10k based on a single person with a 1.5-2k a month mortgage, plus utilities and food. And as a home owner, you will have a lot of things for which that emergency fund will come in handy. It's a matter of when, not if. Consider, 5k for a new roof, 6k for a hvac system, 1.5k for exterior paint, 500 for the plumber, 750 for pest control, 250 to have the tree removed that fell in a storm. 1000 for a new fridge. 500 for a new water heater. 1200 for washer and dryer. ALL of these are periodic costs, and they all able to fail before they're supposed to.