Can you use retirement funds to buy a second home? Technically, yes. Retirement funds are funded with your money. But perhaps a better question might be: Can you withdraw money from your retirement funds early to buy a second home and not incur penalties? The answer generally is no, not before age 59 1/2. And even when you can buy a second home with your retirement funds, that answer is conditioned by restrictions and other factors. Here’s what you need to know.
A financial advisor can help you create a financial plan for your home buying and retirement needs.
You Can Withdraw From a Retirement Fund, But It Depends
Generally, it isn’t easy to withdraw money from a retirement fund to buy a second home without getting penalized with a 10% early withdrawal tax. Here is a quick scorecard of how retirement funds work when you’re thinking of 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 house, you will get hit with a 10% penalty. But it’s worth mentioning that you can withdraw up to $10,000 and use the funds to purchase, build or rebuild your first home without being subjected to the tax penalty. Though you may have to pay income taxes on that $10,000.
- Self-directed IRAs. Here’s the one exception to withdrawing funds from an IRA to purchase a second home and avoiding getting hit with taxes. If you have a self-directed IRA, you can purchase a second home with the funds and not incur a penalty, but this is a complicated financial transaction. Your self-directed IRA will actually own the house, not you. And you can’t live in the second home. It would purely exist as an investment. It also should be noted that those funds can be used to buy property but not build property. This is an investment that only sophisticated investors should try.
- 401(k)s. Similar to IRAs, you can’t withdraw money to put toward a second home before age 59 1/2 without getting hit with a 10% tax penalty. But what you could do is take out a 401(k) loan and use that money to build or buy a second home. You wouldn’t get hit with the tax penalty, and you also wouldn’t have to pay taxes on what you take out, but you would pay the loan back with interest. This really isn’t a bad thing in the long run: you’re paying yourself back and ensuring that your retirement funds will be there down the road.
In short, it can be difficult to withdraw from a retirement fund to buy a second home without getting penalized for it by the IRS.
Retirement Fund Alternatives to Buy a Second Home
Rather than raiding your retirement funds to purchase a second home, you may want to consider these three common strategies:
- HELOC. If you have equity in your existing home, you could use a home equity line of credit (HELOC) or a home equity loan. But these can also have disadvantages. For instance, when interest rates are higher, borrowing equity from your home is more expensive than it would be with lower interests.
- Cash out refinance. Somewhat similar to a home equity loan or HELOC, this strategy would help you refinance your first home and get cash out of the equity, which could go towards a down payment on a second home.
- Fractional or shared ownership. This strategy allows you to buy part of a property, like a timeshare. There are plenty of pros and cons to consider first, but that type of arrangement can come in handy for people who want a vacation home but don’t plan on living at the second home year-round.
If you want to use retirement funds to buy a second home, you should first note any restrictions and other consequences for your retirement savings before making a withdrawal. It might be worthwhile to calculate how much money you would lose over time by taking an early withdrawal and compare other alternatives for your financial plan.
Tips for Investing in Retirement
- A financial advisor can adjust your retirement plan for your investment needs and goals. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you want to know how much an investment can pay, SmartAsset’s free investment calculator can help you get an estimate.
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