Roughly 98% of people want to own a home, according to a recent Bank of the West survey of over 600 U.S. adults ages 21-34. But coming up with the required funds can be tough. To finance their purchases, one in three millennial homeowners withdrew money from or took loans against their retirement accounts, according to the same survey. Meanwhile, one in five millennials who are planning to buy a home expect to do the same.
If you don't have quite enough saved for your first home, you are allowed to pull money out of your retirement accounts, such as a 401(k) or an IRA. But while dipping into your retirement savings may help you put down a bigger down payment and lower your mortgage rate, it also may mean those savings could experience a long-term setback. Think of it this way: You are not allowed to draw on your future Social Security payments to buy real estate and older generations weren't allowed to use their pensions.
Technically, you can withdraw the money from a Roth IRA if you’ve had one for at least five years: Those under 59 ½ years old can borrow up to $10,000 without penalty if you’re a first-time homebuyer. If you’ve been contributing to your Roth IRA for less than five years, you can still pull out up to $10,000—but you’ll have to pay income taxes on the amount. If you have a 401(k), you’ll want to borrow the money as a loan, rather than taking it outright. Getting the money as a loan (up to 50% or $50,000, whichever is lower) helps you to avoid income taxes and a 10% early withdrawal penalty.
Experts agree that instead of using retirement savings to purchase a new home, future homeowners should look to cut expenses from current spending. And perhaps most important: Consider scaling down dream homes. Just over 40% of millennial homeowners in the survey said they felt they made poor financial choices.
Careful financial planning is needed so that this generation can “have it all”—the dream home today, without compromising retirement security tomorrow, says Bank of the West's Ryan Bailey.
You can find the full CNBC article here.