Q&A: What to know about buying a house using retirement funds

Dear Liz: My husband and I are thinking of purchasing a house near us. Can we use any funds from our retirement accounts to make the purchase? We would like to use this money along with some savings so that we do not have to carry a mortgage.

Answer: You don’t mention how old you are, whether you’re currently homeowners or what type of retirement accounts you have, which are all important factors.

If you’re under 59½, withdrawals from IRAs and workplace plans such as 401(k)s are typically taxed and penalized. You can avoid the penalty, but not the taxes, if you’re considered a “first-time home buyer” and you withdraw up to $10,000 from your IRA to buy a home. (“First-time home buyer” just means you and your spouse haven’t owned a home within the last two years.)

This exception doesn’t apply to workplace plans such as 401(k)s. However, if you’re still working for the employer who provides the plan, you could consider taking a loan from your account.

Loans typically must be repaid within five years, but your employer may offer a longer payback period for the purchase of a primary residence. If the employer permits plan loans, the loan limit is typically the lesser of $50,000 or half the vested account balance, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

An exception to the 50% cap is if 50% of your vested account balance is less than $10,000, Luscombe said. In that case, you can borrow up to the lesser of $10,000 or the balance in your account.

If you have a Roth IRA or Roth 401(k), the amount you contributed can be withdrawn for any purpose without taxes or penalties, Luscombe said.