My wife and I will be 50 in a few months, and so far we have $800,000 in retirement savings in a combined 401(k) and IRA. We recently took the opportunity to purchase our dream property. Ultimately, the last nursing home was due to be built five to ten years after him, and he had pretty much used up his other savings for a down payment.
Without savings to rely on, I worry that buying a home will eventually become a financial burden. Ultimately, this will be your retirement home, so should you consider putting $100,000 (minus fines and taxes) into retirement to pay it back?
We live in Southern New Mexico.
Related: “I can’t keep up with this pace”: I’m 61, single, and have an MBA. I’ve been using up my savings since I lost my job. what’s my next move?
Dear Planners,
Your dream home is a sandcastle still floating in the sky. Your retirement account will generate money while you sleep.
I understand the feeling that withdrawing from a 401(k) or IRA will make your dreams come true faster, but it can backfire. There is mounting evidence that inflation and debt are causing more people to tap into their retirement savings into short-term loans that they sometimes may not be able to repay.
You don’t have that kind of pressure. You want to build your dream home and you are clearly committed to the decision, but financial decisions for emotional reasons, especially fear, are often a no-no. is. You wrote that you “recently took advantage of” this opportunity. I don’t think you have made an irrevocable decision yet (and I hope you do).
If you withdraw from your 401(k) before 59 1/2, you will have to pay a 10% penalty, and if that’s not enough, you will have to pay income tax when you withdraw $100,000 early. Therefore, you will need to withdraw well over $100,000 to meet your needs. The Internal Revenue Service has made every effort to discourage you from taking such actions.
We do not mention whether you have a traditional IRA or a Roth IRA. A Roth IRA allows you to donate after-tax dollars. Traditional IRAs are funded in pre-tax dollars and post-retirement withdrawals are taxable. This makes a Roth IRA a good option for younger people, as investors in their 20s and 30s tend to have lower taxes.
According to the IRS: “Generally, early withdrawals from an Individual Retirement Account (IRA) under the age of 59½ are included in gross income and subject to an additional tax penalty of 10%. There are exceptions to the 10% fine, For example, using IRA funds to pay for medical insurance after unemployment.”
Withdrawals from Roth IRA may be subject to tax in some cases. Depending on many factors, you may also be penalized. For example, withdrawals must be made after 59 1/2 years and after a holding period of 5 years. exception This early exit penalty includes first-time homebuyers. Does this apply to you too? — Eligible education costs, and maternity/adoption costs.
Vanguard saw Increase in hardship loans: In 2022, 2.8% of those with retirement plans will initiate difficult withdrawals, up from 2.1% in 2021.However, according to Fidelity, 401(k) loan balances and average loan amounts are on a downward trend: The percentage of people with outstanding loans fell from 21% five years ago to a record low of 16.6% in Q1 2023.
Think twice before you dive in.
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