Author Topic: Is using my minimal retirement savings for down payment a terrible idea?  (Read 5273 times)

PaulM12345

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(I hope this isn't bad form here, but I'm reposting part of a post I made in the investing category; I realized it's not specifically about investing, but home buying too, so this might be a better place for it...)

Hello,

I have a question about what to do about my retirement savings.

My family has no debt and we rent a house. We have been relatively thrifty over the years. I got some money for college from a relative about 10 years ago, and I worked in college so I managed to have about $16,000 left over when I graduated. About six years ago I entered a brief period of investment excitement, and I invested it in Vanguard funds. I have about $12K in Roth IRAs, and $4K in a regular Individual account.

My wife and I want to buy a house. I won't go into whether or not this would be a good investment here, but let's assume it IS for the moment (and we're planning on paying it off quickly).

Now, I believe that I can use my Roth IRA funds for a down payment on a first home purchase without paying early withdrawal fees. a) Is this true? b) How do I determine whether this makes sense or not? Do I prioritize getting a 20% down payment together? The standard doctrine is to not touch my retirement at all. They way I see it though, is that 16K is not that much money and it's not making money either. My wife and I have good careers and the potential to save a lot more over the next 10 years, at least moving in the direction early retirement, if not fully retired. I like my job and it is very flexible, so I don't particularly want to retire from it anyway.

So: What should I do? Cash out my $16K in about a years time and count it towards my down payment? Or save less than 20% and keep my investments invested?

I would appreciate any advice.

Thanks!

grantmeaname

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Can you? Certainly.
You can take contributions out of a Roth IRA at any time, for any reason, and you won't be penalized. The rules for Roth IRA withdrawal (such as a down payment on a first home purchase) allow you to also take investment earnings out of the IRA. The accounts also have a 'contributions first' principle. If my account had $34k in it, with $30k due to contributions and $4k of investment earnings, every dollar that I withdrew from the account would be a 'contributions' dollar (no questions asked under any circumstances) until I withdrew the $30,001st dollar from the account. From that point on they would be 'earnings' dollars, and I would need a justification (medial expenses exceeding x% of income, college expenses, first home down payment) to avoid a 10% penalty. In other words: yes, you can withdraw money from the Roth IRA without penalty. In fact, you can withdraw for any reason, and you only need an IRS-approved reason if you're close to totally cashing it out and you've already withdrawn all of the 'contributions' money.

Should you? I say no.
As mentioned above, it's easy to get money out of a Roth IRA. If you're retiring early, this is great: with no questions asked, you can use money that you've put aside for retirement even if you're only 30. One of only two ways to access retirement account money young is to put it in a Roth IRA if it's not already, in fact (and the other technique, substantially equal periodic payments, is totally unfeasible for the next few years, so if you retired today the Roth rollover would be your only option). If you do so, any money so converted has to sit in the Roth IRA for five years before you can withdraw it.
The problem with Roth IRAs is that you can only put in $5k a year each, and that $5k a year is the only thing you can withdraw when you retire young (again, earnings are penalized without a reason). If you're retiring in 10 years, that means you and your spouse can together only save a total of $100k (plus a little, because the contribution limit is indexed to the CPI) in tax-advantaged retirement accounts. If you're doing most of your retirement saving in 401(k)s or similar plans, and you want to get the money out by a Roth rollover, that $100k plus the portion of the $12k you have now attributable to contributions will be all of the tax-advantaged money you can use for your first five years of retirement. Those dollars are precious few and when you run out of them you have to use more 'expensive' regular brokerage account funds.

Does that make sense?

Gerard

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A couple of counterpoints to Grant's position (suggested tentatively, as I'm Canadian and may not understand all the tax implications):
1) Depending on your income (and expenses) in retirement, you may be in such a low tax bracket that that extra $16K is barely taxed at all.
2) How much are the extra costs for having less than 20% down? When I bought my Toronto condo a couple of years back, having 20% down saved me mortgage insurance of at least 1.75% of the mortgage amount. (In fact, I came up with the last few thou with a credit card advance and still came out way ahead!)
3) It's not really an either-or, right? You could just save a little longer and get 20% down without withdrawing from your IRA?

PaulM12345

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Belated thanks Grant and Gerard.

Grant, that IS helpful, thank you. Your explanation about IRAs is just what I needed. Not that I have a solid answer about it, but at least I have a better idea regarding investment strategy.

Gerard, you are right that it is not either or. We are sort of in a position where we are currently renting a house at a cheap rate, but in to suburbs. A move to a more central location, where we could bike, walk, and commute less, would give us a much improved quality of life. The trick is that we want to improve our quality of life, but we don't want to have to rent a house (higher rent), and then move again in a year. We'd rather just buy a house now in the right location, but that would entail either a) spending our retirement for a good down-payment; or b) living in the burbs for longer than we'd like so we can save more money.

I'm still not decided but I appreciate your thoughts.

gooki

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Assuming you are in the USA I say do it now while the housing market is still down. This is assuming you get a good price on a house. And don't be afraid to put in low ball offers. 10 to 20% below asking price is perfectly acceptable.

arebelspy

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Assuming you are in the USA I say do it now while the housing market is still down.

Sooo.. sometime in the next 3-5 years?   ;)
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oaknoll

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Re: Is using my minimal retirement savings for down payment a terrible idea?
« Reply #6 on: September 17, 2017, 12:40:07 PM »
What did you end up doing? How did it work out, 5 years later?


arebelspy

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Re: Is using my minimal retirement savings for down payment a terrible idea?
« Reply #7 on: September 18, 2017, 05:49:56 PM »
What a necro post!

OP has not visited the MMM forums since March 2014, so you're unlikely to see a reply, unless they have email notifications turned on for this post.

What did you end up doing? How did it work out, 5 years later?

Seeing as that was towards the bottom of most markets, probably pretty well.  I'd guess break-even worst case.

Probably a lot less of a good move in 2017.
« Last Edit: September 18, 2017, 05:51:54 PM by arebelspy »
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

frugaliknowit

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Re: Is using my minimal retirement savings for down payment a terrible idea?
« Reply #8 on: September 19, 2017, 02:48:51 PM »
Yes, it's a terrible idea.  You cannot replace those contributions, EVER.  The house can wait.  The Roth (assuming you have it well invested), in my opinion is a much better investment and will build you more wealth than a purchased home will.