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What is the optimal way to source the funds for down payment of a first time home buyer?

I understand if I withdraw 10k of an IRA account there will be no 10% tax penalty, but there will be taxes to be paid on the distribution.

If one has the money in savings for the down payment, should we take the money from the IRA so that we can keep the funds in savings as emergency?

What is the optimal way of thinking about this?

  • @JohnFX and jjanes - Thanks! Both advice are great. I think we will use our savings. Thanks for making me think straight. – Geo Oct 15 '14 at 14:16
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It is a very bad idea in almost all circumstances to borrow/withdraw from an IRA (or other retirement account) for a down payment on a house and I would only suggest it as a last resort. Even as a last resort it is a bad idea, and I'd suggest you aren't ready to buy a house until you have enough non-retirement money to do the deal.

In your case you have money in savings, you should absolutely do that. If you don't feel comfortable using your emergency fund, you need to keep saving until you can afford to buy a house. Your retirement fund isn't a piggy bank for when you need money now, it is a payment you make to keep a decent lifestyle later in life. When you are retired your options for alternate income streams will be much more limited.

The biggest hidden cost is the opportunity cost of not having that money working for you. Your final retirement balance is very likely (when done correctly) going to be mostly comprised of the return on your investment more so than the money you put in. While you are young your greatest asset is time for that money to grow, don't throw that away when you have viable options!

The other problem, if you are talking about an employer plan (401K/Roth) is that if you lose your job you will have 60-90 days to pay back the loan or it will be considered a distribution and subject to taxes plus a 10% early withdrawal penalty. This happened to a bunch of my friends from work when our company got bought by another company forcing them to close the old 401K plan and transfer to the new one.

Short version: Don't touch retirement money for non-retirement things unless it is a life/death emergency and you have no other options.

  • One cannot borrow from an IRA except possibly as a less-than-60-days interest-free loan: once the money is taken out, it cannot be put back into the IRA after 60 days have elapsed. – Dilip Sarwate Oct 15 '14 at 4:23
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Do you think that you had previously been over-saving for retirement?

If so, then the first time home buyers exemption might be a good opportunity for you to reverse that error.

On the other hand, if you think you have been saving the right amount, or too little, for retirement, then why would you undo that savings? "Because I can, under existing tax law" seems like an inadequate answer.

Remember that if you are anticipate to be maxing out your tax advantaged accounts in the near future, then such a distribution is a permanent loss of opportunity. You can't get the money back in.

Are you thinking more clearly now, or were you thinking more clearly back when you decided to contribute to an IRA rather than build up a down-payment fund in the first place?

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