FOUND! Your Down Payment

found your down paymentTaking the time to save a down payment for buying a home might be keeping you from actually buying a home. But you may be unaware that those funds may already exist.

NAR does a Profile of Home Buyers and Sellers report each year which says that 81 percent of first-time buyers pull all or most of their down payment from their savings accounts. It also says that less than 4 percent took a withdrawal from their IRA and 8 percent from their 401(k) or pension funds.

A provision provided in traditional IRAs targets first time buyers or anyone who hasn’t owned a home in the previous two years. A single person or their spouse (married), can take out up to $10,000 from each traditional IRA for a first time home purchase and not get hit with 10 percent early withdrawal penalty. But they will need to claim this withdrawal as extra income for the tax year in which it was withdrawn. For more information, go to IRS.gov.

Allowable withdrawals from traditional IRAs can be from yourself and your spouse; your or your spouse’s child; your or your spouse’s grandchild or your or your spouse’s parent or ancestor.

Roth IRA owners can also withdraw their retirement contributions penalty-free and tax-free for any reason at any age since the contributions are made with after-tax income. As long as the Roth IRA has been in existence for at least five years, people after age 59½ can make withdrawals.

As for a 401(k), you can borrow up to half of your balance or $50,000 whichever is the lesser amount at any age for any reason without penalty or tax assuming your employer permits it. Ask about any special rules for taking a loan against your 401(k) that determines how you repay it and what interest rate you get. All payments plus interest go back into your account so you are essentially paying yourself back. Consult with your human resource department for specifics.

Getting a loan from your 401(k) only becomes a risk if you quit your job or are fired before the loan is paid in full. Check repayment terms to be sure you can meet the payment deadlines. If you go beyond repayment term then the loan would be considered a withdrawal and subject to penalties and tax. Even if you stay with your same employer, if you fail to pay back the loan it could be considered a withdrawal too.

Check with your tax professional who can give you specific information on retirement fund withdrawals and how they will affect your income. You can also find more information at www.IRS.gov.

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