Should You Use Windfall Investment Income to Buy a Home?
What fees and penalties will you face for early IRA withdrawals to buy a home? This is the question we are looking at this week.
Every Monday, we address one of your pressing personal finance questions by seeking advice from several financial experts. If you have a general question or money issue, or just want to talk about something PeFi-related, leave it in the comments or email me at alicia.adamczyk@lifehacker.com.
This week a question from Mike:
We recently made a decent amount of money from stocks (unfortunately this was in our IRA and not in our E-Trade account as we thought). We got an unexpected income of about $ 30,000. We wanted to put this on the house we were buying. Having said that and having read about it on the internet, 1) We are NOT buying a home for the first time. I had a house that was sold three years ago and my wife bought our current house about seven years ago. Will we be fined for using any of these funds to pay our down payment?
2) I also have 401 (k). Can I get any commissions (other than 10% early withdrawal) if I charged $ 20,000 or so?
This is what individual experts usually say about a problem that affects each person differently: if you need personalized advice, you should see a financial planner.
Early withdrawal penalties are imperfect
You are correct that both the IRA and 401 (k) have distribution restrictions. Assuming your IRA is not Roth and you’re under 59 1/2 and not buying a home for the first time, you would be taxed at your regular income tax rate and face a 10 percent withdrawal penalty.
However, the IRA’s first homebuyer clause is broader than you might think. According to Schwab, you qualify as a first-time home buyer “if you or your spouse have never owned a primary residence in the past two years.” So, Mike, you can qualify for withdrawal from the IRA with no penalties of up to $ 10,000 (you will still pay taxes), although your wife will not. Again, this is all for a traditional IRA – different rules for Roths. And $ 10,000 is a lifetime limit.
If available, funds should be used to cover “qualified acquisition costs” such as buying a home or settlement, financing, or other closing costs. And you must use the funds within 120 days.
As for your 401 (k), some “just won’t let you collect your money until 59 1/2, and some that do allow you to charge in excess of taxes and a 10 percent penalty, and some even stop the match for a period of time.” says Doug Bellphy, a Connecticut- based Certified Financial Planner . “It’s important to understand the rules for your particular 401 (k) plan before making any decisions.” So an IRA may be your only option.
If your 401 (k) has a loan option, you can borrow up to $ 50,000, or half the invoice value. The loan repayment period is limited to five years, but can be extended by purchasing a house.
But these are significant fines that can really hurt your overall financial health, windfall profits or not.
“Your best bet is to consider using other down payment funds,” such as after-tax cash besides the related plans and IRAs, says John Gay, a certified financial planner in Texas, “or postpone buying a home until then. until you can save up for a down payment. “
It makes sense to spend the extra money on such a large purchase, but fees and penalties are real considerations.