The general rule is not to touch a 401(k) or IRA before hitting age 59 ½. For individuals who want to purchase a second home using funds from a 401(k) or IRA, however, there are some rules that they should know before accessing those funds.

Early Withdrawal

Most early withdrawals will result in a 10 percent tax penalty. While IRAs do allow for home-related withdrawals of up to $10,000, that rule applies only to a taxpayer's primary residence. That a taxpayer plans to use the second home in their retirement isn't an exception.

Once over 59 ½, individuals can do what they please with funds from their retirement accounts. This doesn't mean, however, that they won't accrue other tax liabilities.

The Type of IRA Matters

For those interested in a second or vacation property, they may be able to use a self-directed IRA. The rules around self-directed IRAs allow individuals to purchase a vacation property, but the fund and not the individual owns the property. 

One of many caveats about this option is that this second home must be an investment, not a residence. Anyone interested in this option should work with a tax professional to ensure they follow the rules and don't incur any tax liability.

Loans

Individuals can't withdraw money from a 401(k), but they can take out a loan against their 401(k). A person would then pay back the loan along with any interest.

Before selecting this option, individuals should consider their 401(k)'s growth compared to the interest rates as well as the property's investment potential. 

Other Tax Implications

A taxpayer uses one of the above options or decides to cash out a retirement account and take the penalty. This isn't the end of tax considerations. A withdrawal not only incurs a penalty, but it may bump a taxpayer up to a different tax bracket. A vacation property also has property taxes, although some taxpayers may be able to deduct all or part of a vacation home's property taxes.

Plan Ahead

While it can be tempting to impulsively purchase a vacation home and figure out the details later, such a decision may have serious tax implications. If you need help, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.