Tapping into Your Retirement Savings to Buy Your First Home

Guest post by Alanna Ritchie

Tapping into Your Retirement Savings to Buy Your First Home

 

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After tying the knot or finding out you are expecting, there’s one great landmark left. It’s time to put down roots – so the house hunt is on.

You narrow down the choices to a few favorite places and start tearing through your finances to find enough cash for a down payment. You realize your budget is already strained.

Where are you willing to turn? Will you borrow from family, beg of friends or steal from your retirement for the joy and security of a permanent address?

With the issue of cash standing between you and the pride and security of being a homeowner, the money you’ve reserved for the future could be the key to affording present needs.

An IRA, 401(k) or annuity can provide capital, allowing you to make the big move. Depending on the type of retirement account you tap into, you will discover different benefits and sacrifices.

Some plans offer tax advantages to first-time home buyers and some do not require you to repay the money you remove. Whichever account you use, you will lose some of the future value of your retirement savings. Evaluate your assets and priorities carefully before you decide which one to pursue.

Qualifying for a Hardship Withdrawal

The IRS allows an exception to some tax rules for first-time home buyers. Owners of IRAs and 401(k)s may qualify for a hardship withdrawals when buying their first home.

Eligible withdrawals are exempt from the 10 percent tax penalty for using retirement funds before 59 ½. You will be required to use the funds within 120 days and have the option of putting the money toward rebuilding a home, buying a home or paying settlement, financing or closing costs.

Do You Have a Traditional or Roth IRA?

You can use up to $10,000 of traditional IRA funds for your new home. If you are married, both you and your spouse can contribute, giving you a $20,000 boost.

For a Roth IRA, you can take out the same amount as long as you’ve had the account for five years. If you opened the Roth IRA earlier, you can still avoid the 10 percent penalty for early distribution, but you may be liable for taxes on earnings.

Have You Been Contributing to a 401(k)?

To utilize funds from your 401(k) for a home down payment, take out a loan against your plan rather making a straight withdrawal. You can borrow up to half of your vested balance or $50,000—whichever is less—without taxes and penalties. When you make payments on this loan, generally your company will ask for an automatic monthly deduction from your paycheck. Many financial advisors do not favor borrowing against retirement funds to pay for things like a house, car or luxury item because they believe too many people end up not paying themselves back and cost themselves an early withdrawal penalty.

Some companies place conditions on these loans. For instance, if you leave the company, you may have to repay the balance of your loan with 30 or 90 days of your last day or else face fees or penalties. If the amount of money you borrow from yourself is substantial, your long-term stability at your job is something to consider.

If you’ve already used your 401(k) allotment, you can take a hardship withdrawal for a home purchase (provided your employer allows it), but you will be responsible for taxes and penalties. Because this is a home purchase, you may be able to set up a repayment plan for 15 years.

Do You Own an Annuity?

If you own one or more annuities or structured settlements, you may be able to sell payments for a discounted rate. However, because annuities are not primarily growth investments, you sacrifice less of an opportunity cost when you utilize these funds ahead of schedule.

If you sell payments scheduled to go to you in the near future, you can get a higher price for those payments than if you sell payments scheduled to come to you year from now. Estimate the monthly income from your Social Security payments and other savings to ensure you will still be able to handle living expenses during retirement.

Pay Attention to the Details

As you decide how to finance your down payment, pay attention to the details and consult a tax professional who understands the complexities of IRAs, annuities and company retirement contracts. This one step alone could save you thousands of dollars.

Keep in mind that taking money from certain accounts will be viewed as income during tax time, possibly bumping you into a higher tax bracket than the previous year.

Good news can also be hidden in the fine print. For example, the IRS rule that allows hardship withdrawals for first-time home buyers extends to include those who have not owned a home in the past two years.

As you and your family contemplate where you plan to grow old together, stay on the look-out for financial resources that go beyond your current income and bank account. You may discover a way to buy your new home sooner rather than later.

 

Alanna Ritchie has spent years studying, writing and learning to love the intricacies of the English language. Today, she works as a content writer for Annuity.org, where her primary focus is personal wealth management.

New car loan with a low credit score…Is that smart?

coupleHow to repair your credit score without getting into long-term new vehicle loans.

Recently Fox Business published an article that talks about current troubling trends in the auto industry. It appears that auto industry, together with some of us who have experienced financial pains in the past few years, are going back into old, unhealthy financial habits.

What do we mean by that? Well, just listen to some of the car commercials on the radio during your drive to and from work and you’ll hear advertisers offering loans on brand new (yes you read it right) vehicles to people with low credit scores.

The commercials appear to be sympathetic in nature, claiming to understand the financial pains of people who may have made some mistakes in the past, or, who due to a poor economy, lost their income for a season.

According to the Fox Business article, the average prices for new cars continues to rise, which forces people to borrow more money and over a longer period of time. As unfortunate as it is, many car dealers are starting to use the subprime loans approach in order to boost sales.

Is purchasing a brand new vehicle and financing it for 5-7 years the right step, especially for those who have a bad credit score? We would argue that it is not only a bad financial decision, but one that can end up costing you more money – money you should be allocating to other necessities like debt repayment and building a solid financial backbone for you and your family.

With the average new car payment reaching new heights of $471 per month, most of us would be much better off driving our vehicles, even if we have to invest few hundred dollars here and there for repairs, while using that cash for other priorities.

So what can you do in order to start repairing your credit? Instead of getting into a long-term new car loan, here is what we recommend you focus on:

– Use any extra cash you have in order to catch up on late payments.
– Make sure you start paying all your bills on time!
– If you’ve recently missed payments on any of your bills for the first time, pick up the phone and ask the credit card company or your utility company to wave the late fee as a courtesy. Many will do that as long as this is your first time offense.
– Get a secured credit card from your bank. Use it for a while to establish a good report with your bank and then ask for an unsecured credit card with a low enough limit to keep you away from trouble. Use the card responsibly and pay it off in full every month.
– Keep paying off your debts in order to create a healthy ratio between your credit limits and your debt.

As you can see, there are plenty of other healthy ways to heal a bad credit score. As you choose to take these steps you will see that you’ll not only improve your credit score but your overall financial position. Sure it can be fun to drive away with a new car, but do so at the right time and for the right reasons.

Fixing your credit score isn’t the right reason to get a new car. Loading up on extra debt isn’t the best way to solve this problem. Stick to the basics and look into the specific areas of your credit score that are contributing to your low marks, and take steps to address those issues.

 

 

 

$25 per month cell phone plan…YES PLEASE

girl with raised armsThere is nothing like a little healthy competition to help you save extra dollars. We’ve all probably experienced both the pains of having to use a monopoly provider, as well as the freedom and the flexibility that comes with being able to shop around for the best options out there.

The more businesses competing for your wallet the better off you are!

Cellphone companies have been competing for years to gain your business, and it seems that every once in a while there is a new player that pops on the scene and offers a great deal to those who are willing to go with someone other than the BIG 4: T-Mobile, Verizon, AT&T and Sprint.

So while the BIG 4 compete amongst themselves for the best family plans, no contract required deals, and how many additional lines you can add to your plan for $10 per month, there are other companies that focus on providing you with simple, reliable service that can save you hundreds a year if you’re willing to give them a chance.

Not every “new kid” on the cellphone block is worth your time, but we think you should at least give Republic Wireless a try! Their reviews have been solid so far.

So how does Republic Wireless save you money? To start with, you have 3 smart phones to choose from. The phones range anywhere from $149 for an 8GB, $299 for a 16GB, or you can build your own phone starting at $349. Your phone becomes your biggest investment. From then on it’s your choice on how much you are willing to pay and for what type of service.

1: Once the phone is purchased you can choose plans as low as $5 per month. This plan would include unlimited talk, text and data, all over Wi-Fi ONLY. This is definitely a plan for someone who does not have the need to be connected at all times.

2. For $10 per month you can get an unlimited talk and text over Wi-Fi and cell plus unlimited data over Wi-Fi.

3. If you are looking for data access outside of Wi-Fi, then the $25 per month plan would do the trick. For that price you will get unlimited talk and text as well as unlimited data, all over Wi-Fi and the network. With the $25 per month plan you will have to settle for a 3G network. Republic wireless taps into Sprint’s network in order to provide you with service when no Wi-Fi is available.

4. If 3G is just not good enough and you absolutely must have access to a 4G network, then a $40 per month plan is available with unlimited talk text and data over Wi-Fi and network.

We found a really great explanation of what 3G and 4G really means and how to decide which one is better for you. If you are curious, you can read more here.

The bottom line for all who are strapped for cash should be to get monthly expenses to an absolute minimum. Shop around. Take some time to evaluate your monthly recurring bills where savings can sometimes go overlooked. Have you found other ways to reduce monthly expenses? Share them in the comments, we’d love to hear from you.

 

 

Become a Financial Superhero

3427459604_a6ff41d263_z(1)There are many small decisions we make every day that can make or break our finances. Some of the most common mistakes that get individuals and couples in trouble are living beyond their incomes, underestimating the destructive power of debt, and taking too much financial risk out of pure greed. The list could go on and on, but as we look at improving our financial position, what are the key issues we should focus on in order to build a solid financial foundation today, and to protect ourselves from unnecessary financial pain in the future?

Reality Check

We can know something yet fail to do it. We can desire certain outcomes yet fail to live in a way that helps us achieve those outcomes. This precisely is the reality of Americans today. According to the National Journal, even though Americans say they want to save more money, they behave in a complete opposite way.

Understanding your financial reality and being honest with yourself is key to achieving your desired financial outcomes. Do you know what your main struggles are? Is it using too much plastic? Is it living beyond your means? Is it careless spending and a lack of understanding where your every dollar goes? Whatever “IT” is, you must first recognize it as an issue that needs to be addressed.

Where are you going?

Do you have any financial goals, or are you simply living one day at a time hoping to make ends meet before the next paycheck comes along?

Top 2014 financial goal for 54% of Americans was to save more money. 38% of Americans said their goal was to set a budget and spend within their budget.

Goal setting and knowing the direction you want to take your finances into is important. Writing those goals down will help you turn wishful thinking into reality and will give you a roadmap to follow.

So what are your financial goals? Do you know where you want to be 3-6 months from now? How about in the next 3-5 years? Is becoming debt-free a dream of yours? How about paying off your mortgage early? Or maybe something as simple as spending less than you make? Go ahead, set some goals, break them down into manageable chunks and start moving forward!

How will you get there?

Now that you recognize the issues that keep you financially strapped and you have a set of goals you’d like to achieve, it’s time to make a list of how you will start turning your finances around. To help you get going we created a quick checklist:

– Create a budget. Do it the traditional way, on paper, or use a FREE online budgeting app like Mvelopes to help you track every expense.
– Make a list of ALL your debts and figure out your date payoff dates based on the monthly payment you are currently making. Need help? Talk with a Money4Life Coach for free, we’ll help you do this with a free debt analysis.
– Pick 2-3 areas in your budget where you know you can make adjustments in order to spend less. If possible, create a monthly surplus of $100.
– If you have no cash reserves, start setting your $100 surplus in order to build your $1000 emergency fund. If you do have cash reserves, use that surplus to reduce your debt faster.

These four simple steps, if applied, have the potential of setting you up for financial stability and financial success.

So what’s stopping you? Do your reality check, write down your financial goals (however small or big they may be), and start implementing the four simple steps we’ve outlined for you. Give yourself 3-6 months and you’ll start experiencing a financial turnaround! Becoming a financial superhero doesn’t require a cape and superpowers, you can get there with the determination to conquer the supervillain: financial stress.