Is It a Good Idea To Dip Into Your Retirement Savings To Pay for Home Renovations?
If you are facing an expensive home repair or renovation, and you don’t have the cash available in savings, you might be tempted to use your retirement funds like a 401(k) or individual retirement account to pay for it. But is it a good idea to tap these funds to pay for home renovations?
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In many cases, the answer is no, as you could lose a lot of money to early withdrawal penalties and taxes. You’ll also forgo the opportunity cost of not letting that money grow.
“It is rarely going to be a good choice to dip into your retirement savings to pay for home renovations. While some people consider home renovations to be an investment, you’ll rarely get your money out of the renovation,” said Jay Zigmont, PhD, Certified Financial Planner, founder of Childfree Wealth.
“Keep in mind that when you take money out of your retirement savings you may have to pay taxes and penalties if you are younger than 59 1/2. Any money you take out of your retirement accounts is also not growing, which steals from your future,” he added.
Even if you’re able to make a hardship withdrawal from your retirement account, you could still be subject to taxes and penalties, and you could be missing out on growing your retirement assets. That said, you may have few options other than to dip into your retirement savings.
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But before you do, consider the necessity of the renovation. “The first step is to make sure that the repair is truly a need, not a want. If it is a need, such as replacing a leaking roof, you will have to figure out the lowest cost solution,” said Zigmont. He suggested considering a home equity line of credit as long as you can pay it off in a reasonable timeframe.
Another option could be to take a loan from your current 401(k), but that carries risks too.
“A 401(k) loan works if you can pay off the loan before leaving your current employer. If for any reason you are laid off, fired, or quit, your 401(k) loan will be immediately due or it becomes a distribution subject to penalty and taxes,” Zigmont explained, adding that many 401(k) plans have a limit on the loan amount and, if you currently have a 401(k) loan, you may not be able to take out another one.
One exception to tapping your retirement savings for home renovations could be if you’re already retired or old enough that you don’t have to pay early withdrawal penalties — generally age 59 1/2. But you should still proceed carefully.
“If you are retired already, your retirement account is effectively your savings account for expenses going forward. The challenge is to withdraw money in the most tax-advantageous way,” said Zigmont. He suggested considering using Roth funds for unplanned repairs to avoid tax penalties and potentially an IRMAA (income-related monthly adjustment amount) surcharge for those on Medicare.
Overall, withdrawing money from your retirement accounts for housing expenses, even if they seem necessary, can put your future at risk. Compare all your options before possibly jeopardizing your retirement, especially since there are often other ways to access funds for home renovations.
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