Is it smart to tap retirement funds to make a...

Is it smart to tap retirement funds to make a down payment on a home?  Credit: Getty Images / Michael Jjung

Millennials want their dream home. Fifty-six percent of the millennials polled in a new survey from the Bank of the West said owning a home was more of a priority than paying off debt or retiring comfortably. The survey, which included more than 1,000 people, also found that nearly one in three millennial homeowners borrowed money from their retirement funds for a down payment.

Is this a smart financial strategy?

Justin Moundas, a real estate agent with Douglas Elliman in Manhassat, sees a lot of first-time home buyers using retirement money for a down payment. “They have heavy student loan debt and rentals are expensive, so a large portion of their paycheck goes to rent. It’s hard to save.”

Consider the consequences: “I borrowed $30,000 against a 401(k) to beef up a down payment. I changed jobs two years later and my tax liability was about $9,000, since I couldn't pay the loan back. The IRS counted it as an early withdrawal. I paid penalties, too. This was one of my worst financial mistakes,” says Bill Borden, a public relations executive in Point Pleasant, New Jersey.

Another downside: “If the market has a run, you’ll miss that upside growth,” says Lou Cannataro, a wealth adviser with Cannataro Park Avenue Financial in Manhattan.

Are you ready for homeownership? Can you really afford a house? “If you have to tap your retirement funds to buy the house, over time you’ll likely tap it again for repairs, etc.,” says Ilene Davis, author of "Wealthy by Choice." If you must use your retirement money, she says, “increase your contributions enough to pay it back within five years.”

Latest Videos