Using Retirement Account to Buy A Home  

One thing I’m often asked is, “Can I buy real estate using my retirement as a down payment?”

Yes, you can!

Ideally, retirement funds should be saved for your golden years, but there are a few exceptions. One of them is a 401k loan if you need quick, convenient, short-term access to cash for a down payment on a home.

How To Borrow From Your 401(k)

About 87 percent of employer-sponsored 401(k) plans allow participants to borrow against their plan savings, according to the Employee Benefit Research Institute. These loans can typically be as large as $50,000. Because a bank doesn’t have to approve your 401(k) loan, you can obtain money for a down payment fast and without a credit check. Your lender will thank you for that last part – credit pulls can be murder on your FICO score.

If you can repay these loans within a few years, there’s relatively little harm to your retirement comfort.

Traditional Individual Retirement Accounts, or IRA’s, also can be utilized for a down payment. IRS regulations don’t allow loans from IRA funds, but up to $10,000 can be withdrawn for a first-time, primary home purchase. This is one of several reasons you can withdraw money from an IRA before age 59 ½ without incurring a 10 percent penalty from the IRS.

Use Your Retirement Account To Purchase Investment Properties

Retirement funds also can be used to invest in residential rental properties or flipping houses, an especially attractive option with real estate prices rising. Yes, your retirement account can hold real estate, just like it can hold mutual funds, stocks and bonds.

When it comes to investing retirement money, many people feel like real estate is more tangible than stocks. They’re tired of the ups and downs on Wall Street, and they like having more control over their investments.

The timing certainly is good. Interest rates remain historically low, despite a recent .25-percent hike in the Federal Reserve rate. And the median home sales price in the Minneapolis area rose 37 percent, or an annual average of 12 percent, from 2011 to 2014 -- from $150,000 to $205,739, according to Minneapolis Area Association of Realtors annual reports.

Consult A Financial Planning Expert

The great thing about doing this is if you buy the property with savings in a self-directed Roth IRA or 401(k), any profits will be tax free. Because this type of investment can be very complicated, we recommend consulting a financial planning expert for help.

So what types of investment real estate are you allowed to buy with tax-free retirement funds? It must be a business property, either commercial or residential, that you lease out full-time, and not to family members, your business, or any business related to your business.

Planning on buying a home in the Twin Cities? Get in touch today to arrange showings.