Last week, the Federal Reserve published a groundbreaking report in an attempt to explain the reason millennials have dragged so many seemingly innocent industries to the guillotine in recent years (although I would argue mayonnaise deserved it).
After carefully considering the data, the authors of the paper revealed the shocking reason millennials aren’t spending as much money as older generations: they’re poor as shit.
Thanks to the power of late capitalism, many millennials are awash in debt and still living at home as they deal with economic realities their parents and grandparents never had to deal with— which may have something to do with the fact those generations caused those problems in the first place.
Millennials are also struggling to save money (if they’ve even managed to save anything at all), and while an absurd number think they’re going to be millionaires, many are taking some questionable routes to get there.
A lot of younger people are bucking tradition by waiting longer than ever to get married and have kids in addition to one of the more monumental moments in life: buying a house.
If you’re like me, you’re regularly swamped with letters and emails from your bank letting you know they’re there for you if you want to take out a mortgage as if they don’t know full well how depressingly little you have in your account.
I’ve watched enough HGTV to tell myself I’m ready for the responsibilities that come with homeownership, like being really interested in HVAC systems and having a modern but timeless backsplash in your kitchen.
Unfortunately, there’s one barrier getting in my way of owning my own place: that whole “money” thing.
During the peak of cryptomania last year, stories surfaced that people were taking out mortgages to buy Bitcoin which, as we all know by now, wasn’t exactly the smartest financial move.
However, if a recent trend is any indication, millennials are also taking a big risk with mortgages that could come back to bite them in the ass the long run.
Earlier this year, a survey came out that revealed one-third of millennials who have purchased a home dipped into their retirement savings to help cover the down payment. Ryan Bailey, the head of the company behind the report, expressed his concern, saying:
“Tapping your 401(k) to buy a home should be a last resort. Millennial homebuyers should exhaust all other funding options first…
“Millennials are so eager to become homeowners that some may be inadvertently cutting off their nose to spite their face.”
With that said, there are plenty of people out there who have decided to prioritize their short-term needs over their long-term financial goals and could be paying a major price in the process.
What Happens If You Take Money Out Of Your Retirement Account Early?
Taking money out of your retirement is an inherently risky move; in doing so, you’re betting that whatever you use your new funds for will create a greater return on your investment than decades of compounding interest might.
If it works out, great! If it doesn’t, at least you’ll get to spend all of those well-earned bonus years on the job counting the number of rounds of golf you’ve missed out on thanks to your shortsightedness.
It’s a win-win!
However, if the Property Brothers have given you the confidence you need to withdraw money from your retirement fund in pursuit of real estate gold, there are a few things you should take into consideration depending on what kind of account we’re talking about.
Let’s take a look at two major options.
What Happens When You Take Money Out Of A 401(k)?
Most people rely on a 401(k) when saving for retirement. This type of account allows you to take money out of your paycheck before taxes and have it deposited into various stocks, funds, and bonds.
One of the perks of a 401(k) is that you aren’t taxed on any capital gains like you would be if you made money on your own off the aforementioned investments, real estate, and even cryptocurrencies (if you somehow made money on cryptocurrencies).
There’s a preconception that you’ll be hit with a penalty if you take out money from a 401(k) before its matured (which is usually when you’re around 59). This is true; you’ll have to pay 10% of what you withdraw as a penalty in addition to applicable income taxes.
However, there are a few loopholes.
Uou can use a 401(k) to your advantage by taking out a loan against it, which is capped at 50% of your total retirement portfolio (or a $25,000 max). In most cases, these loans are relatively low in interest and can be paid off over up to five years.
By going this route, you won’t be charged a penalty but there is one major risk I haven’t mentioned: if you leave your employer, you’ll have to pay back the full amount within an accelerated period of time. Additionally, you may be barred from contributing to your account for six months after taking it out the loan.
If you’re looking to get into the real estate game it’s not a terrible option but there’s another alternative that’s a bit more buyer-friendly.
What Happens When You Take Money Out Of A IRA?
An IRA is pretty similar to a 401(k) at its core: you let strangers do things with your untaxed money and hope they make you rich someday. You’ll also be hit with a 10% penalty and taxed on any early withdrawals you make.
However, unlike a 401(k), you don’t need to be employed by someone to open your own account (although your maximum yearly contribution is capped by the IRS instead of your employer).
If you’re in the market for your first house then you can theoretically use an IRA to your advantage. The tax nerds in Washington will largely turn a blind eye to your withdrawal as long as it’s below $10,000 and being used for the purchase of your first home (you’ll still have to pay income taxes on it).
It’s worth noting each person’s retirement account is its own entity, so if you’re married, your spouse can take out another $10k if the two of you are willing to risk a big chunk of your nest egg to enter the oh-so-stable and predictable real estate market.
Of course, there are other retirement options out there (the Roth version of both of these have slightly different rules) but I haven’t taken a personal finance class since high school so I’m not going to even attempt to navigate the complexities of other retirement funds.
While it can be tempting to eat the withdrawal penalty to solve other problems you’re currently facing, keep in mind you’re potentially setting yourself up for even more trouble when your body is tired and achy. Before you pull the trigger, it’s important to take a serious look at the numbers to see how much you could lose in the long run by doing so.
However, if you’re really concerned about achieving #LifeGoals, turning to your retirement account to buy a house isn’t the worst move you can make (especially if you have an IRA).
Just don’t say I didn’t warn you.