IRA loan for home purchase


By Roy Lewis

It's not often that you can take money from your traditional IRA or from your earnings in a Roth IRA before age 59 1/2 and avoid the dreaded 10% early withdrawal penalty. But, surprisingly enough, this is one of the tax benefits enacted as part of the 1997 Taxpayer Relief Act to help people become homeowners.

Now the law allows individuals to receive distributions from their traditional IRAs to pay up to $10, 000 of first-time homebuyer expenses without incurring the 10% early withdrawal penalty that usually applies to withdrawals from a traditional IRA before age 59 1/2. But, even though the penalty is waived, you will still be required to pay taxes (as applicable) on the traditional IRA withdrawal itself.

The rules for taking a distribution from a Roth IRA to finance a first-time home purchase are slightly different than those for a traditional IRA. Remember that a withdrawal taken from a Roth IRA for the purchase of a first home is considered a qualified distribution after the account has been open for five tax-years. As such, any distribution taken from a Roth for that purpose and under those conditions will be both income tax- and penalty-free.

But also remember that under the Roth distribution ordering rules, the first money out will be annual contribution money, which is never taxed or penalized. Next out would be conversion money, and that also would not be taxed or penalized provided it has been in the Roth for five tax-years. And last out would be earnings. Therefore, because of these distribution rules, that means the only money taken from a Roth IRA that might pose a problem would be either earnings or conversion money that has been in the Roth for less than five tax-years.

What happens if you take earnings or conversion money before the necessary five tax-years have run? Well, in the case of earnings, you still meet the exception to avoid the early withdrawal penalty, but you don't meet the criteria for a tax-free withdrawal from a Roth IRA. Accordingly, just as you would for a withdrawal from a traditional IRA, you must pay an ordinary income tax on the distribution.

When it comes to taking a withdrawal of conversion money early, you won't owe income tax because you already paid that during the original conversion. Ordinarily, though, those under age 59 � would owe the 10% early withdrawal penalty for taking the money before five tax-years had passed since the conversion. But a distribution for a first home purchase is an authorized exception to the early withdrawal penalty on IRA distributions. Therefore, conversion money, even when taken early, may be used for this purpose free of penalty.

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IRA or 401k for a home addition?

2006-10-05 19:29:06 by home_whore

What are the implications of taking money out of an IRA rollover account? I assume taxes, and probably penalties, but there was a time when either a 401k or IRA rollover could be borrowed against for home purchase or improvements... right? Or am I delusional?
I'm trying to figure out if a home loan (and the interest etc.) is better than borrowing against or drawing down on our IRA or 401k.

You're referring to the rule for Roth IRA's,

2004-08-10 22:37:30 by Grabitquick

Not 401(k) plans. There is no $10,000 penalty-free withdrawal from a 401(k) plan for first-time home purchase. Hardship withdrawals are available in many 401(k)'s for the purchase of a principal residence, but not beyond the immediate need and generally only AFTER you have already taken out the maximum loan.
For the original OP, if your 401(k) plan allows loans, you are limited to the lesser of $50,000 or 50% of the vested balance. If you're fully vested in your 12K, then you have only 6k available for a loan. If you need to get rid of 6K in credit card debt or something like that before shopping for home financing, then maybe a 401(k) loan is a good...

I think I do have enough for retirement

2007-04-24 12:11:39 by patart

•$130,000 home paid for completely.
•$300,000 in IRA for retirement.
•$32,000 in various stocks.
•$4,000 in Orange Savings account.
•$500,000 life ins. policy on me with 16,000 cash value if surrendered today.Probably should cash it out and purchase a term policy.
•$150,000 life ins.policy on my wife with $5,500 cash value if surrendered today.Probably should cash it out and purchase a term policy.
•$40,000 in the bank at this time on my business.
•$215,000 cash in a side business in which we loan money to local rehabbers for 6 months to 1 year at 12-18% depending on the term

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