Should You Tap Your IRA to Buy a Home?

It may sound tempting, but it's probably not the best idea.

Buying a home is a tricky prospect even in a normal housing market. But in today's market, it's been extremely tough.

Home prices are up still on a national level despite a recent housing market cool-down. And with mortgage rates being high, it's putting a lot of would-be buyers in a tough position.

If you need extra money to swing a home purchase, you may be inclined to tap your IRA to get that cash. Normally, withdrawing funds from an IRA before age 59 1/2 results in a 10% penalty on the sum you remove. But there's an exception for first-time home buyers.

You can tap an IRA early to buy a first home as long as you don't remove more than $10,000 for that purpose. And if you and a spouse each have an IRA, you can each take a $10,000 withdrawal from your respective accounts. But just because you're allowed to remove that money without penalty doesn't mean you should.

The problem with tapping an IRA to buy a home

An IRA isn't designed to be an account where you save money for a home purchase. Rather, it's supposed to be a retirement savings plan. And the more money you take out of your IRA ahead of retirement, the less you'll have available for your senior years.

Now, you might think $10,000 isn't such a big deal in the grand scheme of retirement savings. But remember, if you take a $10,000 withdrawal, you'll lose out on the chance to invest it. And that could mean being short a much larger sum of money in practice by the time retirement arrives.

In fact, let's say you remove $10,000 from your IRA to buy a home at age 35 and retire at 65. If your IRA normally gives you an average yearly 8% return, that $10,000 withdrawal could cost you about $100,000.

How to scrounge up extra down payment funds

Tapping your IRA may be an option if you need extra money to buy a home, but it's not your only one. If you need extra cash for a down payment, try getting yourself a side hustle. The gig economy is looking strong these days, so there may be ample opportunity to pick up a second job and use your earnings to help make homeownership more attainable.

Another option, of course, is resetting your expectations. Homes are pricey today, so it may be that instead of buying a four-bedroom with an updated kitchen, you'll have to settle for a three-bedroom with a less fancy kitchen until you can afford more.

It may be tempting to take an IRA withdrawal to buy a home since that money is, after all, yours. But that doesn't make it a wise decision.

You're going to need a fair amount of money to live comfortably as a retiree, so leaving your IRA alone is really the better bet. Doing so could mean having to wait another year to buy a home, or compromise on the home you purchase. But that's a far better scenario than retiring with inadequate savings and winding up cash-strapped later in life.