Dear Dr. Don,
I am considering cashing out some of a retirement IRA to use as part of a down payment on a vacation home. I understand I will incur a penalty and that I have to pay taxes. I do not have other money available as a down payment. The mortgage rate is fantastic, 3.99 percent for 30 years and I don’t have to pay on the home mortgage for 12 months.
As background, I’m in my early 30s, married with no kids. We are a dual income household and we expect our income will be on the rise in the next few years. Currently, it’s a combined $150,000 but it should be at around $250,000 to $300,000 in five years.
At that point, I would be able to aggressively save for retirement. Given this opportunity to buy a beautiful brand new beach house in Rehoboth, Del., does it make sense to use the IRA money as a down payment? I would be taking out about half of the money, or $60,000. We would be able to afford the monthly mortgage payment and currently own a primary residence.
I thank you in advance for your thoughts on this situation.
— J.D. Buyer
It sounds like you’re already sold on the idea; you just want validation. There are other life goals to work toward besides retirement, and for many people a vacation home is one of those goals. Financing and property values aren’t likely to be this low again, so the time could be right to invest in this beach house as your second home.
While I don’t like to encourage readers to view their retirement accounts as a method of financing nonretirement goals, your plan to replace this money over the near term can make this withdrawal a speed bump instead of a road block in achieving your retirement goals. Instead of $60,000 invested in your retirement account, you’ll have about $40,000 invested in real estate. Who’s to say which will be the better long-term investment?
Investing $60,000 in an IRA account in your early 30s would be worth about $460,000 after 35 years if you were able to earn 6 percent on the money. Of course, part of that sum belongs to the government, as you would owe income taxes on the distributions out of the account.
Not having to pay on the mortgage for 12 months may not make economic sense if all that is happening is that the interest expense is being capitalized (meaning it is being added to the loan balance). If you’re able to afford the mortgage, starting payments now can make sense if it’s a choice between that and capitalized interest.
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