It’s good to be generous, but don’t give until it hurts. That’s what some parents and grandparents are doing to help their children or grandchildren buy that first home.
A recent survey by Legal & General Group found that last year, more than a million parents and grandparents in America shelled out $41 billion to help the younger generation buy their first home. Fifty-four percent tapped cash savings intended for retirement.
Talk about regrets. Fifteen percent said they are worse off as a result of their “gift,” and 14 percent said their financial future was less secure.
Young folks, here’s how to give mom, dad and your grandparents a break.
Borrow from yourself
“Roth and traditional IRA accounts are the ideal accounts to withdraw from," says Ruth Shin, CEO of PropertyNest, a Manhattan real estate listing site. For a first-time home purchase, she adds, "you can take up to $10,000 penalty-free, granted the money is spent" on expenses like a down payment or closing costs "within 120 days." Just know that there is a $10,000 lifetime limit on such withdrawals, she says.
You will need to pay regular income tax on the withdrawal, said Josh Zimmelman, president of Westwood Tax & Consulting in Rockville Centre.
If you don’t spend the money because the home purchase is delayed or cancelled, you may pay the money back to your IRA. If you do so within 120 days, you won’t owe taxes on it.
However, don’t take money from your 401(k) unless absolutely necessary. Says David Silversmith, a certified financial planner with Grassi & Co in Jericho, “Understand the tax effects of early 401(k) distributions. I had a client who did this without telling me and it catapulted her up two tax brackets and left her with a huge bill.”
Not-for-profit groups as well as federal, state, county and, in some cases, local government agencies offer loans and grants for down payments, closing costs and repairs. They include the State of New York Mortgage Agency, which offers low-interest, low-down-payment loans to borrowers who might struggle to qualify for mortgages from private lenders.
Says Shin, “You can receive up to $15,000 toward a down payment and closing costs. SONYMA [State of New York Mortgage Agency] offers a few different programs for assisting first-time home buyers.”