In February, the median existing U.S. home sold for $384,500, as per the National Association of Realtors. That’s a 5.7% uptick from February 2023.
Higher home prices have made it difficult for a lot of first-time buyers to come up with down payments. Even though many mortgage lenders will accept down payments that are lower than 20%, putting less than that amount down on a conventional mortgage results in PMI (private mortgage insurance), a costly expense that can be a burden for new homeowners.
If you’ve been struggling to save for a home, you may be considering tapping your IRA. Normally, IRA withdrawals taken before age 59 1/2 are subject to a 10% early withdrawal penalty. But there’s an exception for home buyers.
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If you’re purchasing a first-time home, you can remove up to $10,000 from your IRA penalty free. And if you have a spouse and you each have an IRA, that option applies to each of you so that jointly, you can access $20,000 in IRA funds penalty free for the purpose of buying a home.
Raiding your IRA might seem like a good solution if you’re trying to get into a home as quickly as possible and your down payment savings have stalled. But here’s why that plan might sorely backfire on you.
When you end up with a shortfall later in life
Any time you remove funds from an IRA, whether to buy a home or handle an emergency expense (something that, for the record, generally won’t exempt you from the aforementioned penalty), you don’t just lose out the sum you’ve taken out. You also lose out on the chance to invest it. And that’s where you might run into trouble.
Over the past 50 years, the stock market has rewarded investors with an average annual 10% return. That average return accounts for strong years and weak ones.
Let’s say you take $10,000 out of your IRA at age 32 to buy a home, and you don’t retire until age 67. That means you’re missing out on 35 years of gains on that $10,000. At a 10% return, that means having $281,000 less in available retirement income. And that, frankly, is huge.
Think twice before tapping your IRA
Since up to $10,000 of your IRA savings is yours to access penalty free for the purpose of buying a home, you may be inclined to take advantage of that opportunity. But remember, you’ll be giving up a different opportunity — the chance to invest that money.
If you’re tempted to take a $10,000 withdrawal, or any withdrawal for that matter, remind yourself that you could end up being out a lot more money than the sum you’re removing in the long run. When buying a home, hopefully that will sway you to sit tight, save more, and purchase a place of your own at a time when you don’t need to tap your IRA to do it.
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