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I am looking at purchasing my first home, as my calculations show it would actually be cheaper to pay a mortgage (and related fees) than it would be to continue renting.

I have some savings, and some investments, some bonds, and fairly low debt (no credit card debt, and less than $3000 in low interest personal debt).

I have two IRA accounts, one normal and one a SIMPLE IRA which my employer contributes to. My IRA is currently "just sitting", after recently being rolled over from a closed 401k account.

I am contemplating "raiding" my normal IRA and just paying the taxes now plus the early-withdraw penalty. This would be for adding to my down payment on a home.

This IRA account currently is valued around $10,000. I have about $3,000 in savings, $2,500 in securities, and another $2,500 in matured us saving bonds.

Raiding this IRA would yield a substantial penalty, since I am currently 26 years old. I'm estimating being able to keep somewhere around $6,000 after taxes and penalties.

Together, this should provide around $14,000 for a down payment and other related expenses. I am seeking a first-time home buyer's program, so this down payment should be more than enough.

I am trying to avoid asking family for any assistance with this purchase, so coming up with any needed funds on my own is preferred. This would also financially wipe myself out, however since my total cost of living would decrease when it was all said-and-done, this may be worth the temporary financial constraint.

Since my IRA is no longer receiving contributions, and a good annual growth rate seems to be around 5%, I figure the home investment will yield a greater return in 5-10 years. So even after initial penalties, it feels like a better investment.

I am seeking advice on this strategy. Perhaps I'm not considering all ramifications of this move.

Is raiding my IRA now in order to bolster my down payment a good option?

  • 2
    FW(L)IW there is an exception to the 10% IRA early-withdrawal penalty for first-time homebuyer up to $10k lifetime given you meet certain requirements. You do owe regular tax, probably 25%, and depending on your state maybe something to them. – dave_thompson_085 Mar 21 '16 at 19:49
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You left out a critical piece of information: Can you get a mortgage without raiding the IRA? Explore all avenues for this. If you can find away, then you really should not raid that IRA. Giving the IRS a nice $4,000 gift is not generally a good start to a financially secure future.

It may or may not be the case that buying is financially advantageous. Factor in upkeep (which turns out to be a LOT), property taxes, and miscellaneous costs like HOA fees, water, etc., that you are not paying now. Remember there are large transactions costs to buying (closing costs, for example). Look at these carefully. It may still make sense to buy but do so going in with your eyes open.

I would forget the growth rate argument, though. You and I have no idea what the market will yield over the next however many years and we also have no idea how much (or if) your house will appreciate. No point in speculating or hoping. When doing this calculation, just look the monthly costs of a house vs. those of renting.

Ok, you read all this and you NEED that $6,000 to buy the house and you are sure you are ready for a house? I guess it's up to you. To me it seems more likely that waiting and saving up enough for the mortgage is better than sacrificing so much in fees to the IRS. $6,000 isn't all that much to save up and hopefully won't take long.

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No way.

A home costs much more to maintain than the monthly payment. You will have no cash margin, and one costly event will put you at risk of missing payments or going further into debt.

  1. Pay off your personal debt.
  2. Save up cash - down payment + at least 3 months expenses
  3. Buy!

In general, raiding a tax advantaged account is a bad idea mathematically, but also a bad habit to get into.

  • I'm looking at saving around $400-$600 every month on my payment alone (renting in my area is very expensive right now). I've been renting a house for the past 6 years, so am aware of major events and their cost to repair. I do have life-lines if necessary, so am not majorly afraid of maintenance issues. I'm more-or-less concerned about my logic of raiding my IRA. It seems I stand to grow more if invested in a home, rather than an IRA which is no longer receiving any contributions. I could re-invest that IRA, but will earn a modest 1-5% annually. – Raymond.B Mar 20 '16 at 23:24
  • @Raymond.B when you say "This would also financially wipe myself out" I think you are making my point for me. A costly event could be any life event, not just home maintenance. $400 a month is a good incentive to move towards buying soon, but just have enough stability to do it well! – jkuz Mar 21 '16 at 15:28

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