‘No, no, no, no, no!’ My wife and I are close to retirement, but we want to buy a house. Should I empty my 401(k) for the down payment?

Would clearing out my 401(k), which is the smaller one, to put a down payment on the house be a bad idea? I know I would be taxed on it, but hopefully I can cover that. I am over 59 years of age, and I am hoping to retire in six years. My wife may retire a little before that.

Thank you,

Waiting in Westchester

‘The Big Move’ is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage.

Do you have a question about buying or selling a home? Do you want to know where your next move should be? Email Jacob Passy at [email protected].

Dear Waiting,

I don’t like to tell readers no. It’s clear that buying a home is important to you and your wife — naturally having a place to call your own would provide a sense of security and stability as you enter your retirement years and adjust to a fixed income. But as the cliché goes, by way of The Rolling Stones, we can’t always get what we want.

I presented this hypothetical scenario to financial planners. Across the board, virtually all of them cautioned against this. Some were more blunt than others.

“Here’s my expert insight on this matter: No, no, no, no, no!” said Peter Palion, founder of Master Plan Advisory, a financial planning firm based in New York.

Like many other prospective home buyers, you might see mortgage rates rising and feel the need to lock in a lower interest rate while you still can. And to some extent, there’s an argument to be made that guaranteed savings in the form of lower interest is worth missing out on the potential growth of that money through investing. The calculus changes as we get older and near retirement, though.

“While rates and growth are not guaranteed, financial-planning models would show that using one-third of your retirement savings to buy a new home in the beginning of retirement would produce less disposable income in retirement, net of mortgage payments,” said Sean Pearson, a financial planner with Ameriprise Financial Services in Pennsylvania.

You’re at a point in life where the goal should be to maximize your retirement savings. One reason why, Pearson notes, is that those funds will come in handy as you and your wife’s health declines. You want to have ample resources to cover your living expenses in the future.

This is also true of owning the home. Sure, the down payment is the first hurdle, but down the road you’ll need to keep paying taxes and maintenance, even after the mortgage is paid off. So what would happen if you don’t have the funds to cover that well past your retirement? I doubt you or your wife would want to risk foreclosure or living in squalor down the road.

I also worry that you’re underplaying the potential tax hit here. Some 401(k)s allow for distributions while you’re still employed — in some cases without the typical 10% tax penalty if the person is over the age of 59.5 years. Even still, any distribution from your account would be taxed as income. Adding $200,000 in income via your retirement account would easily put you into a higher tax bracket — a very expensive proposition. And really, once taxes are factored in, you wouldn’t really be receiving $200,000 anyway.

Some financial planners suggested you could take out a 401(k) loan. By doing this, you would essentially be loaning money to yourself — and you would have to pay it back, with interest. A loan like this isn’t considered a taxable event. “They could borrow up to $50,000 each in this fashion, which should go a long way toward a down-payment for a couple with only a few years left until retirement and a $600,000 nest egg,” said Paul Winter, a financial planner based in Utah.

Again, though, taking money out of your retirement accounts to put toward a down payment has a big opportunity cost — it likely won’t earn as large a return by being invested in a home as it would being invested into the market.

Ultimately, if buying a home will save you money in the long run, you may want to consider a smaller down payment, even if that means you need to pay for mortgage insurance. You don’t need a 20% down payment to buy a home, and you could focus on paying down the principal more quickly once it’s purchased by making extra payments to clear the additional costs of mortgage insurance.  

If you and your wife have not done so, I would sit down with a financial adviser to lay out your goals for retirement. They could run an analysis on your current retirement savings to estimate how far they will stretch — and from there, the two of you can decide whether purchasing a home makes financial sense. You both deserve a peaceful, fun retirement, and being deliberate about how you spend your money these next few years can help to guarantee that.

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