One of the most difficult steps toward buying that first home is coming up with a down payment. Yet many people already have a down payment sitting in their 401(k)s and IRAs that they can tap without triggering stiff tax consequences.
One of the most flexible options allows a couple to jointly borrow up to 50 percent or $100,000, whichever is less, of their individual 401(k). They can do this tax and penalty free, as long as the money is paid back. You can use the loan for home buying, home improvement, or just about anything. If you use the money to buy a primary residence, the payback can be extended from 5 years to 10 years. You can also tap your IRA for up to $10,000 without penalty to help family members buy their first home, providing it’s your first time using the homebuyer exclusion.
Eric and Amanda tapped their IRA when they helped their daughter buy her first home. Eric, a self-employed contractor and Amanda, a legal secretary, had a sizable IRA they could borrow from. When some past clients offered Eric a great deal on a home that was part of an estate sale, he was able to move quickly by borrowing against their IRA. In addition, not having to tap into his business credit lines or qualify for a home equity loan was a big convenience. However, before you borrow from your IRA account, check with a tax professional to make sure you qualify for these exclusions.
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