Risky behavior: 1 in 3 millennials dipped into 401(k) or IRA to finance home purchase

Adam Shell | USA TODAY

Show Caption Hide Caption Millennials buying homes Millennials move in with mom and dad to save for a new home.

Many millennials are stretching financially to buy homes.

Members of this younger generation are exhibiting risky behavior when coming up with a down payment to buy a home, with about 1 in 3 (29 percent) saying they raided their 401(k) or IRA or borrowed against their retirement accounts, a move personal finance pros say could hurt their financial well-being, according to a new survey from Bank of the West.

Long known for being cautious when it comes to taking risk and approaching the unpredictable stock market with trepidation, millennials now view real estate as the "cornerstone" of their investment portfolio. Nearly 6 in 10 (56 percent) cited homeownership as the most popular ingredient of the American Dream, according to the bank's "2018 Millennial Study" released Thursday. Being debt-free ranked second at 51 percent and retiring comfortably came in third at 49 percent.

Still, their rush into the housing market (42 percent said they own homes) and their decision to take on mortgage debt and dip into accounts earmarked for retirement is "alarming," as it could put other financial goals at risk, says Ryan Bailey, head of the retail banking group at Bank of the West.

"Tapping your 401(k) to buy a home should be a last resort," Bailey tells USA TODAY. "Millennial homebuyers should exhaust all other funding options first."

If a millennial does opt to tap retirement savings, Bailey recommends taking out a loan. A loan must be paid back to your account with interest and doesn't result in a tax penalty, IRS rules state. And while the cash withdrawn for the 401(k) loan won't be able to grow in your retirement account, it's still a better option than withdrawing money from your 401(k), which triggers federal and state income tax and a 10 percent early withdrawal penalty. Roth IRAs allow penalty-free withdrawals of up to $10,000 for a first-time home purchase, although your earnings may be subject to a tax if the Roth is less than five years old. Homebuyers looking to tap their 401(k) or IRA should also see if they're eligible for hardship withdrawals.

The survey suggests that millennials – 40 percent think owning a home is a "good financial investment" – are rushing into their home-buying decisions and may not be asking the right questions before making the plunge.

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In fact, 2 out of 3 (68 percent) millennial homeowners cited "regrets" or "buyer's remorse" after their purchase. The homeowners had issues with the cost of maintaining a home and felt too stretched financially.

"That tells us they haven't thought it through," Bailey says.

Still, 92 percent of millennials who don't currently own homes said they would like to buy one someday, according to the survey of 609 millennials between ages 21 and 34 conducted in November 2017.