||Ask the Dollar Diva
How do I use my pension to buy
Dear Dollar Diva,
My wife and I are young professionals looking to purchase our first
home. We do not have any cash saved up and we do not have family
members from whom we can borrow. We would like to use the money
from my 401(k) or my wife's 403(b) retirement plan for the down
We just moved and started new jobs and could rollover
our 401(k) and 403(b) retirement plans if needed. What would be
the best thing to do?
The best thing to do is be grateful you don't have
family members to tap for the down payment on your dream home --
those loans carry a lot of baggage, financial and otherwise. Two
bright, competent young adults like yourselves are certainly capable
of figuring out how to buy a home on your own.
The Diva doesn't like the idea of taking money from
your retirement plans, even if you do avoid the 10 percent early
withdrawal penalty as first time home buyers. Here's why:
- The distributions are taxable. At 28 percent,
a $10,000 withdrawal puts $7,200 in your pocket, and $2,800 in
- You gain $7,200, but you give up tax-deferred
growth and earnings on $10,000 of retirement money. Using a 10
percent rate of return over 30 years, that's goodbye to $174,500.
If you both withdraw $10,000, say au revoir to a whopping $349,000.
The Diva thinks it's a lousy trade-off.
- Adding a chunk of taxable income to your
tax return could have some unexpected results, such as reducing
or eliminating your deduction for student loan interest. See the
does a 401(k) lump sum withdrawal work?" for other potential
- Homeownership is expensive. If you don't
have the discipline to save up for a down payment, what are you
going to do when you have to replace the roof or the central air
Rent or buy
You've just moved to a new place. How well do you
know the area? Are you pretty sure you'll be living there for more
than a year or two? When you close on a new home, expect to pay
thousands of dollars up-front for a title search, title insurance,
survey, appraisal, recording fees and loan origination fees. You
want at least three or four years over which to amortize these costs.
To help you determine if renting would be a better
option for you, plug your numbers into a rent vs. buy calculator.
The Diva did a little Web surfing and found a couple for you to
try out: Quicken's
"Rent vs. Buy" calculator and HouseHunt's
"Buy vs. Rent Calculation."
Tapping into your retirement savings
If you've done everything possible to save up for
a down payment, like living in a cheaper apartment and cutting down
on spending for non-essentials, but you still need to tap into your
retirement funds to start the home-ownership ball rolling, so be
Check with the plan administrators of your 401(k)
and 403(b) plans to find out if you can get penalty-free distributions
as first-time home buyers. If you can't, have them rollover the money
directly into your IRA accounts, and take the penalty-free distributions
Here are the rules for taking penalty-free early distributions
as first-time home buyers:
- Each of you is allowed to withdraw up to
$10,000 to buy a new home; that's a total of $20,000.
- The money must be spent on costs related
to the purchase of a principal residence. It can be used for the
down payment, settlement charges and closing costs.
- "First-time home buyer" means you and your
wife did not own a principal residence at any time during the
two years prior to the purchase of the new home.
For more details on penalty-free distributions for
first-time home buyers, read IRS
Publication 590, Individual Retirement Arrangements (IRAs).
-- Posted: Oct.26, 2000