Can I Use My Retirement Plan to Help Me Purchase a Home?
A popular belief is that you cannot use retirement funds to help with the purchase of a personal residence. Oh sure, you could take a distribution from your IRA and get hit with ordinary income tax, and worse yet, if you’re younger than 59½ the IRS will hit you with a 10% early withdrawal penalty. So, if you took a $100,000 distribution from your IRA, how much are you likely to pay in taxes? For a middle-income person under the age of 59 it could easily be $40,000!!
Said another way, your $100,000 only gives you $60,000 in purchasing power.
Hmm? The tax consequences for early distributions are quite punitive, and that’s why most people would not use this method. But what if there was an IRS approved way to tap into your retirement plan, AND pay NO taxes?? Read on….
Most employer sponsored retirement plans have a personal loan provision, and some of them have a SPECIAL provision for the purchase of a personal residence. What kind of retirement plans can offer a personal loan? 401K’s, 403b’s, 457b’s, and defined benefit/pension plans. How do you know if a loan option is available? Call the plan provider and ask them. IF, and ONLY if the plan documents include the personal loan provision would you have the option of taking a personal loan. Please be aware of the IRS rules about personal loans:
- An individual can borrow a maximum of $50,000 or ½ of the account value, whichever is greater
- Maximum length of the loan can be as high as 20 years for the purchase of a personal residence.
- Loan must be fully amortized (No interest only loans)
- Must charge yourself a “reasonable” interest rate (NOTE, you are paying yourself interest, NOT the bank)
- Need to make at least Quarterly payments, or the loan could be subject to distribution if you pay less frequently. You can make loan payments more frequently than quarterly, but not less frequently.
What if your employer plan does NOT offer a personal loan option, or what if they do not offer the extended loan option for the purchase of a personal residence? Is there another option? Perhaps. There is a retirement plan called a solo 401K that allows you to establish the plan document rules. Since you establish the rules, obviously you can incorporate both a personal loan option and the personal residence loan option. This plan may be a fit for the self-employed, or individuals that own a business. Feel free to contact New Direction Trust to learn more.