Should You Dip Into Your Retirement Savings to Cover Home Improvements?

Home improvements are sometimes necessary to make a house safer, more comfortable or more functional, but they are often very expensive. Many homeowners struggle to save money for upgrades and consider tapping into their retirement savings to fund projects, especially for urgently needed repairs, such as a roof replacement. Dipping into money set aside for your golden years may or may not be a wise move, depending on your circumstances.

How Close Are You to Retirement?
Borrowing from a retirement account could help you avoid high interest rates associated with credit cards or loans, and the money could be used however you saw fit. However, you’d reduce your retirement savings, and money that you contributed later might not have enough time to accumulate interest and get your savings back to the level they were at before the withdrawal.

This means that how far you are from retirement is a key part of the equation. Generally speaking, borrowing from retirement accounts is not a good idea if you’re nearing retirement age. If you’re decades away from retirement and you can continue to make regular contributions and allow your money to grow from compounded interest, you should be able to build your savings back up by the time you retire.

Potential Taxes and Penalties
If you withdraw money from a 401(k) or a traditional or Roth IRA before age 59 1/2, you’ll have to pay a 10 percent early withdrawal penalty and income taxes. In addition, the money that you withdraw won’t be able to accumulate interest. The total hit to your retirement savings could be much larger than the amount of the withdrawal because you could lose years or decades of potential savings with compounded interest.

Talk to a Financial Professional
If your home needs repairs as soon as possible, tapping into your retirement savings may seem like an attractive option. In some cases it makes sense, but in other situations it can be too risky. Consider the type of work your home needs, how urgent it is, the cost, how much money you currently have saved, how far you are from retirement, and the potential taxes and penalties you could have to pay. A financial advisor can help you understand the implications and weigh the pros and cons so you can make the right decision for your circumstances. If you’re considering cosmetic changes or improvements that can wait, you might be better off exploring other financing options.