When purchasing a home with a mortgage loan, you'll need to come up with a down payment. This down payment will vary by lender, but the amount of money you'll need can be large. If you are purchasing a $200,000 home and your lender requires a 10 percent down payment, you'll need to come up with $20,000. You can borrow from your a retirement savings plan to come up with your down payment funds. You'll have to decide, though, whether this is the right financial choice for you.
Borrowing From a 401(k)
Not all companies let employees borrow from their 401(k) plans, but those that do generally allow employees access to as much as half of the money in their plans up to a maximum of $50,000. Employees can borrow this money at any age and use it for whatever they'd like without suffering any penalties or paying any taxes. You should be careful, though: You will have to pay back the money you've borrowed, typically within five years. Also, if you resign or you are fired you usually must pay back what you've borrowed in 60 or 90 days. Otherwise, the withdrawal will become a distribution, which means you must pay taxes on it. If you leave your job before you turn 55, you face a 10 percent penalty when the money is not paid back on time.
A Roth IRA gives you flexibility when making withdrawals. However, you can't borrow from it and then return the money. You can withdraw all of your contributions -- not the earnings on those contributions -- without paying any taxes or penalties, no matter how old you are and for any reason, including a down payment on a mortgage loan. If you are at least 59 1/2, you can also withdraw the earnings you made on your contributions without paying taxes or penalties. Again, though, you must be careful: If you withdraw earnings from a Roth IRA before you turn 59 1/2, you will have to pay a 10 percent penalty and taxes.
The Roth IRA does come with an exception if you are using the funds to purchase a first home. In such a case, both you and your spouse can take out up to $10,000 in earnings from your Roth IRAs without tax or penalty -- even if you are younger than 59 1/2. The phrase "first home" is a bit misleading here. You can take advantage of this exemption even if technically you have owned a home in the past. Under IRS rules, you qualify for the first-home exemption as long as you or your spouse have not owned a principal residence in the last two years.
The traditional IRA represents the worst choice to tap into for a mortgage down payment. You will have to pay taxes and the 10 percent penalty on any money you withdraw from a traditional IRA before you hit the age of 59 1/2. An exception is allowed if you are using the withdrawal to pay for the purchase of a first home. In such cases, you and your spouse can take up to $10,000 from your IRAs without paying the 10 percent penalty, no matter how old you are, but you will still have to pay taxes on this money. Remember, too, that this exception only counts for the purchase of what the IRS calls a first home.
Weighing Your Options
Even if you can borrow from your retirement savings plan to pay for a down payment on a mortgage loan, that doesn't mean it is always the best choice. You'll be grateful for the money you've saved once you do hit your retirement years. The more money you have available to you, the more comfortable you'll be financially after you leave the workforce. You might consider other options for down payment funds, such as a gift from family members. You might also consider an FHA-insured loan, which with sufficient creditworthiness requires only a 3.5 percent down payment.
Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.