Tap Retirement Money to Buy a House for Cash? Home ownership has become something like a philandering spouse to the faithful and long-suffering American public. The betrayals have been many: predatory mortgages, devastating foreclosures, wrenching declines in value, failed modification programs. And yet our passion for it still burns brightly: According to a survey released last week by the real-estate site Trulia, 70% of U.S. consumers polled continue to view home ownership as an essential part of the American dream.

A 53-year-old woman in North Carolina who asked to remain anonymous, says it's all she thinks about. (For the purposes of this article, we'll refer to her as Jane.)

Jane's divorce was finalized in May, and now, she wants to relocate to a city with a stronger job market, where she's looking to spend up to $100,000 on a bungalow for herself and her 100-pound dog. "He is by far the best medicine any medical professional could have [prescribed], as he gets me out of the bed each morning for a 4-mile walk and gives lots of love and understanding," she says. "He is my only child."

Right now, Jane pays $300 a month for a 200-square-foot studio. "All I've ever wanted was a two-bedroom, one-bath with a vegetable garden, that will give my dog the freedom to be an animal again," says Jane, an Army brat who has lived all over the world. "I just want stability and peace, a little home to call my own that no one can take away." She surfs real estate websites such as Homepath.com, where Fannie Mae markets foreclosures.

Jane has no debt and solid assets, including $140,000 in retirement savings. She also has cash, stocks and bonds worth $30,000; and $57,000 through a Qualified Domestic Relations Order, an agreement that transfers assets in a divorce, typically pension or retirement plan benefits.

But her income prospects appear meager. A saleswoman who formerly earned up to $80,000 a year, Jane has been out of the workforce for a decade. She sent out hundreds of résumés, but could only find a position as an "on call" bellman in a hotel, "which means I work when they want me with no benefits except a 401(k)," she says. She earns $750 a month, and will receive $2,000 a month in alimony for two years.

Jane thinks her low income will disqualify her for a mortgage, so she's considering cashing out the QDRO and borrowing or withdrawing from her retirement accounts to pay cash for a house. (Any money she cashes out will be hit with a 10% penalty, plus income taxes.)

Why Losing Her Liquidity Is a Risky Move

Gabrielle Clemens, a Boston attorney and financial adviser specializing in divorce, suggests Jane find a job in a city that offers housing in her price range, relocate, and then rent for a year or two. "Her financial picture is still in transition. If she gives up $100,000 of her limited liquidity, there is no way of getting that back," Clemens says.

"She could get a home equity loan, but with the alimony being short-term and a job situation that precarious, she may not qualify," Clemens adds. "She wouldn't have the cash flow to handle any large expenditures" such as home maintenance and repairs, or rising property taxes.

Dr. Lois Vitt, founding director of the Institute for Socio-Financial Studies, says Jane's desire is understandable, because home ownership is deeply tied to identity. "A new role as homeowner not only expresses autonomy and freedom, but the beginning of new cherished life and a sense of security," says Vitt. "Long term, a housing investment is no more frivolous than a savings account that earns nothing."

But Vitt also thinks Jane should avoid tying up all of her cash. Instead, she recommends putting down 50%. "She might be able to find someone who wants to sell so badly they will [provide] a mortgage," Vitt says.

Don't use retirement funds to pay for the house, advises Carole Peck, a certified financial planner in Florida who specializes in women in transition. "She is sacrificing long-term security for short-term security," says Peck. "It doesn't seem that she has the earning potential to rebuild her 401(k) in way that will replenish her retirement funds. She needs to look at them as absolutely sacred."

Peck would like to see Jane put her resources into finding a better job, and then save up a down payment. "What if she gets a job, and that job moves her someplace else? She has a house she may not be able to sell," says Peck.

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"In working with people going through transition, there is always that anchor they try to find, that sense of stability," Peck explains. "They make decisions based on a very short time frame in their minds, and it usually isn't the best plan for the long term."

Even with a 100-pound dog, Jane can still find a home to rent for a few years, giving her a new start without the financial baggage of home ownership. Peck, who owns two German Shepherds, is a renter herself. "There are people who can't sell their homes and are more than willing to rent them because they need someone to cover the mortgage," she says.

Struggling with your own personal finance situation? I welcome your questions but it's also about your wisdom, ideas, and experiences that may help other readers. Email your question in writing, or send a short video of yourself asking the question, and we'll post it with the response on Daily Finance. We can also Skype; tell us if you can too. Email me at laura.rowley@teamaol.com. You can also follow me on Twitter @MoneyHappiness.

Content Solely Informational: Content on this site is for informational purposes only and is not intended to be investment advice, or any other kind of professional advice. You must determine for yourself or in consultation with a professional whether any financial strategy or advice is right for you.

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first of all if not terribly depleting you money buy buy buy. So many good deals out there. Second get rid of the dog all they do is eat and **** and cause enormous vet bill. Whats wrong with a **** zu. They dont shed, travel well, eat very little and poop very little. Do the math

October 31 2011 at 7:16 PM Report abuse rate up rate down Reply

Check out another website http://www.RETIREREPORT.com for daily information from around the country/world.

October 12 2011 at 3:18 PM Report abuse -1 rate up rate down Reply
jimbo to the rescue

these financial advisors are crooks, their goal is to keep you in bondage paying a mortage or renting. go for that house. the best area to buy is here in ohio houses are dirt cheap here she can get a decent 2 bedroom 1 bath that needs little for 15k and as for retirement funds she can put her money in a master limited partnership that pays 6 to 8 % safely without all of the risks of non dividend paying dow stocks or s&p 500 stocks that jump around like a fish out of water. you own the house its yours no one can take it away, interest rates can't change on you only thing you need to do is pay your taxes (in a decent neighborhood here about 1100 annually) and insurance and also let those safe pipeline stocks dividends re invest and get quarterly payments when you have enough and retire comfortably, bet no financial advisor is gonna tell her that! and you don't have to pay someone who doesn't have your best interest at heart, they wanna give you bad advice and take advantage of your lack of knowledge. get outta that 401k tax trap also, how are you gonna be penalized for withdrawing your OWN money!! criminal, that's what it is. go somewhere like sharebuilder or somewhere where if you need to withdraw for some reason there is no penalty, when you withdraw form a 401k at any time you are heavily penalized plus at 70 and 1/2 you are taxed on any distributions as regular income. crap, crap, crap look around, network with investor clubs for older people, educate yourself so these crooks can stop ripping you off!!

October 04 2011 at 5:10 PM Report abuse rate up rate down Reply

Hi Laura,
There is another option. I am an internet marketing consultant. One of my clients helps with IRA/Real Estate purchases. I do not want this to appear spammy, so I am not going to name the company, but he developed a proprietary Safe Harbor directed IRA. It allows the investor to purchase IRA/ real estate and to use and occupy that real estate immediately. He has been doing this since 1992 and his process was audited by the IRS in 2005.

October 04 2011 at 5:03 PM Report abuse rate up rate down Reply

Go for it Glory. Alternative is paying rent. You should be all cash anyway and certainly cannot earn much on that today. Sounds like she has simple needs and would think she could pick up a little cottage for much less than $100k. She is borderline flush compared to many and if she should follow her simple urge to have a place of her own.

October 04 2011 at 11:05 AM Report abuse rate up rate down Reply

Buy the house. Keep the mortg. boogie man out of ur pocket. God does not want people hog tied to these banknotes.
To pay those sapsuckers for thirty yrs is mad. Do not pay rent for long periods either, the first comes around too quick.
By the foreclosed house make the bank beg u to buy the house, lowball the bank. Hire the handyman in ur church to
help u fix the house; leave the high priced contractors alone. Most houses are not perfect not ever the expensive ones.
U build ur house, u hire the framers, the plumber, electr. and u just saved seventy percent.

October 04 2011 at 7:28 AM Report abuse rate up rate down Reply

It really depends where Glory decides to move. I'm with the financial advisor, who cautions against tying-up cash in a home, particularly when at 53, Glory doesn't have nearly enough to retire comfortably even at 65! We MUST change our view of home ownership and renting. What in the heck is wrong with renting? Some folks are still stuck on the egregiously promoted notion and now proven to be spurrious idea, that home ownership is the way to wealth...it, like any other investment, asset, can go up in value and it can go down. Homes, apartments, condos, trailers are shelter, that's all. No more, no less. There are some terrific rentals out there that can provide the type of home environment for Glory and her 'beast' UNTIL, she has funded her retirement more. Why take on a debt that will require more, MUCH more than the mortgage payment? Something major could go wrong, and what would she do? Tap the other half or her retirement savings to fix it? Rent, rent, rent. Housing is going nowhere, interest rates are going nowhere. You've got time to earn it, save it and then buy, if you still want to. Frankly, why would you want the headache. (I am a homeowner, by the way and retired.)

October 03 2011 at 6:15 PM Report abuse +1 rate up rate down Reply
2 replies to MONTOOTH's comment

@montooth, with all due respect, I've never heard a financial advisor say, "yes, you have enough money to retire." The mantra is, "No, you don't have enough money, but hire me and I will sell you advice."

And isn't "retire comfortably" an oxymoron? No such thing for middle America, we're just going to have to retire on pretty much nothing, Wall Street has robbed 401ks and pensions repeatedly.

October 04 2011 at 11:56 AM Report abuse rate up rate down Reply
1 reply to Greg's comment

Point taken. I try to use the shorthand, euphemistic lingo of the majority of folks on the blog. You're right, "retire comfortably" will mean various things to a wide variety of folks. Increasingly, though, as folks really zero-in on what they want to do in retirement and really put a fine point to their expenses and income calculations, we are seeing that folks CAN retire on much less than they or their advisors forecasted. Renting, instead of buying, moving to a less expensive state; working part-time--these are all strategies that folks can use to retire when they want. But they should exercise common sense. Glory cannot afford to buy a home right now, in my opinion. So, it depends on many, many variables. My advice to everyone: SAVE, SAVE, SAVE...and after you have done that, save some more. I retired last year, sold my home, moved to a less expensive area, bought a new home and am very glad I did. However, unlike Glory, I have a pension, will receive social security and have substantial savings. I still monitor expenses, track investments and run the calculations with inflation adjustments and other variables on a regular basis. So, "comfortable", does not mean complacent. I don't work with an advisor, I know my numbers and I think that's where everyone should start. Know your numbers, know what you 'think' you might want and then do it, but only if the numbers make sense.

October 05 2011 at 3:59 PM Report abuse -1 rate up rate down

@montooth, with all due respect, I've never heard a financial advisor say, "yes, you have enough money to retire." The mantra is, "No, you don't have enough money, but hire me and I will sell you advice."

And isn't "retire comfortably" an oxymoron? No such thing for middle America, we're just going to have to retire on pretty much nothing, Wall Street has robbed 401ks and pensions repeatedly.

October 04 2011 at 11:56 AM Report abuse rate up rate down Reply

No, don't "tap" your retirement. Run the numbers, she takes 100k from her 401K and buys the house cash, well she doesn't clear 100K, First she has to pay 10% penalty (100Kx10%= 10K) then add the 100K to her income and pay income tax on that, more then likely another 25% (100Kx25%= 25K) so what she ends up with, out of the 100k is 65k. Best thing to do is RENT, if she can rent for 300 a month, cut her bills down to about 1000 a month, what she gets for alimony for 2 years, if she gets it all, and what she saves from working, she can save about 34K (plus interest), then go look for a house. And how knows, in 2 years she might be working full time, she might want to move, a lot can happen in 2 years.

October 03 2011 at 6:07 PM Report abuse +1 rate up rate down Reply
Lawrence G

I took part of my retirement and purchased a small home with a studio in back. I take in 1,900.00 a month. Not bad i say. It was a forcloser. with that money i can take a vacation any time. property taxes are only about 900.00 a year. so, rent it or live in it

October 03 2011 at 4:52 PM Report abuse +1 rate up rate down Reply
1 reply to Lawrence G's comment

This is a good idea, BUT will she have the money to make the payments if the renters move out and it stays empty for a couple of months, also to make repairs when needed. The thing is, is she willing to give the government around 35 cents on every dollar she takes out of her 401K retirement? Yes, there's tax wright off, but she also has to add the rent to her income and pay taxes on that. One thing she could do, is check with a financial/tax adviser and see if she could let the 401K buy the rental property as an investment and look in that direction.

October 04 2011 at 5:33 AM Report abuse rate up rate down Reply

The best thing to do now is withdraw your 401k,pension if the govt has there way within the next few years there gonna make us use it towards there crappy bonds that they cant pay themselves.especially if shes 53 she doesnt have to pay the penalty.get it while you can cause the govt is gonna do with our pensions and 401k what they have done to our social security system.OH and If think the economy cant get worse theses foreclosers are going to be sprouting there little heads again thanks to the media and govt keeping it all quite lately .buy houses,gold and silver.

October 03 2011 at 3:53 PM Report abuse -1 rate up rate down Reply
1 reply to fredh610's comment

atlas shrugged

October 03 2011 at 5:05 PM Report abuse +1 rate up rate down Reply
1 reply to maa2626's comment

@maa2626, ain't it the truth.

October 04 2011 at 5:41 PM Report abuse rate up rate down