Should I Liquidate My Retirement to Buy a House?

I’ll start right out by saying that the answer is usually “no”. But there are exceptions. Retirement accounts are like . . . I don’t know . . . delicious pork barbeque. Once you’ve put all the necessary ingredients on to cook, you don’t have to mess with it a great deal. Time and heat do the rest. Replace “pork” with “money” and “heat” with “contributions, yields, and compound interest”, and you have the recipe for good investing. But some people find themselves in a situation where they would be able to change their life, if only they could milk their IRA just a little bit. I’ll go over the rules, my thoughts on the matter, and leave the decision to you. 

1)    What Can you do? If we’re talking about a tax protected account like an IRA, you can always withdraw your contributions with no penalty. Other kinds of accounts have their own rules, but since we’re talking retirement, we’ll pretend like the IRA is our only option. After 5 years, you can also withdraw up to $10,000 over and above your contributions up to that point. This is the case for exactly this purpose. If you’ve made your maximum contributions for at least 5 years, you’ll have at least (about) $30,000 available to withdraw after 5 years. This is enough to use as down payment for many homes. If you decide to do this, you’ve got to make sure to use the money within 180 days, or you will have to pay a penalty. The penalty is 10% of the withdrawal, the same penalty you’d pay if you just starting withdrawing IRA funds willy-nilly. You won’t do that, of course (right?), so the above is as far as you can go for free.

2)    What Should You Do? If you’ve got to invest the money one way or another, it may be good to look at what the money can do for you in various roles. If you leave it in your IRA for instance, and you’ve invested in low cost mutual funds, you may be receiving a 9% return on that investment. Not at all shabby. By comparison, you may see only a 4-5% return on your home’s value, if you liquidate the account to pay for the house. That’s not terrible, but only about as good as investing in bonds. However, you’ll be buying the ability to earn equity and build wealth with your monthly mortgage payments. You’ll also have the psychological and intangible benefits of being a homeowner. If that’s worth the extra 4-5% to you (or more if your home doesn’t appreciate as much or . . . egads . . . loses value), then it may be worth it to you. Of course, you can lose money in mutual funds too. Let’s do one last thought experiment and see what would happen if you left the money in your IRA and did nothing to it. I’m working with fuzzy numbers, but basically if you leave your $30,000 in your account for the next 30-40 years, it will amount to almost $700,000, even in you don’t add any more money to it. Is that amount worth losing to you in exchange for a house? That is sort of a false dichotomy, and you’ll do better to talk the matter through with a finance professional. But these are the kinds of questions you need to ask yourself in order to make the right choice for you.

So what is the right choice? If it were me, I’d leave the money in the account. But the decision is up to you. Look over your priorities and goals. Take in all the information you