Some young savers who have managed to amass a significant amount of money in their retirement accounts, such as 401k, have been discussing how to withdraw part of their savings to buy a house. Experts have come out to say that this could be a harmful decision and recommend them to do something else.
According to BMO Financial Group’s Real Financial Progress Index, in a survey of 2,505 U.S. adults, 30% of them said they wanted to buy a home and planned to withdraw funds from their 401(k) retirement plan to finance that purchase.
Millennials and Gen Zers Want to Turn Their Retirement Savings Into Homes
Of those surveyed, millennials and Gen Zers are more likely than previous generations to decide to withdraw their money from their 401(k) fund, according to this survey, at 31% and 34% respectively. For their part, only 25% of Gen Xers plan to do this and 16% of baby boomers plan to tap their retirement savings to buy a home.
On the other hand, one of the things that slows down potential buyers are interest rates: 71% of respondents said that they were waiting for them to go down so that they could make that move of withdrawing their retirement money and turning it into a dream home. The high cost of living and insurance is also one of the obstacles for 43% of those surveyed in this study. But in general the outlook is discouraging because 67% dream of owning a house, but 73% consider it an unattainable goal.
Recommendations From the Experts: “Don’t Do It”
Stacy Francis, a certified financial planner and president and CEO of Francis Financial in New York City, is one of the experts recommending against doing this, and proceeds to explain. Generally, early withdrawals from retirement accounts can result in taxes and a penalty of up to 10% unless the account owner meets one of the exceptions listed. “You really, really, really, really shouldn’t be taking out your retirement for a house,” she said.
There are several exceptions that apply and that avoid penalties and surcharges to early withdrawals of 401(k) funds. To begin with, disability is one of them. If you have one of these funds and become totally or partially disabled, and that prevents you from working, you can withdraw your money from your accounts without penalty.
If the main beneficiary dies, one of his survivors can receive money from his retirement account without paying the penalty. You can also withdraw money from your retirement account to pay for qualified medical expenses if they exceed 7.5% of adjusted gross income in the current year.
Learn More: Why Dave Ramsey Advises Halting 401(k) Contributions While You’re in Debt
On the other hand, also at the time of becoming unemployed you can withdraw money from your retirement accounts to pay the health insurance premium, as long as you have received unemployment benefits for at least 12 consecutive months in the current year and in the previous year.
Victims of domestic violence are another group of people who can withdraw up to $10,000 from their account without penalty. Finally, those whose lives are impacted by natural disasters can withdraw up to $100,000 from their 401(k) retirement funds without penalty, as long as their main home is located in an area declared a disaster zone by the Federal Emergency Management Agency (FEMA).
This You Can Do: Get Up To $10,000, Penalty Free
Now, there is also a possibility to buy a home: First-time homebuyers who qualify can get up to $10,000 without penalties. In the case of Roth IRAs, owners can withdraw from their after-tax contributions at any time and without penalty, but that’s a separate type of retirement.
And although it may sound attractive to withdraw those funds, which is your money anyway, to buy a home, and housing is a beautiful dream that we all have as part of the American dream, doing so involves its own set of financial risks, experts warn.
Statistics on Retirement Savings Withdrawal
According to Vanguard’s “How America Saves 2024” study, in 2023 3.6% of savers withdrew money from their retirements to face economic difficulties, a significant increase compared to 2.8% in 2022.
And is that leaving the money working in your savings account can bring great benefits, and in fact it does. For example, a 30-year-old worker who did not touch $10,000 from his 401(k) could end up with almost $77,000 extra if he retires at age 65, assuming there is a sustained average annual return of 6%.
And believe me, that $77,000 is going to come in handy when you reach retirement age, because the costs of housing, health, food, transportation, and other items increase as we get older.