an alternate down payment source

An Alternative Down Payment Source

If you invest in or have a company-sponsored 401k, 403b or have a life insurance policy, you may know that you can borrow funds against these sources. Alternatively, you cannot borrow against the funds in a traditional or Roth IRA without incurring a 10 percent penalty before 59 ½ unless you use it for one of these specific purposes: first-home purchase, qualifying higher education expenses or for a permanent disability.

First-time homebuyers who met the eligibility can withdraw up to the lifetime maximum of $10,000 from their traditional IRA. In turn, your eligible spouse can do the same penalty-free. Even if you owned a home in the past, you may qualify as a first-time homebuyer if it has been more than two years ago.

Typically, the withdrawal of these monies would be used as a down payment or for closing costs. But you could use these monies to increase your current down payment to negate the need for mortgage insurance.

Another condition for withdrawing money from an IRA without penalty is to return the borrowed amount to the IRA within 60 days. One caveat, it can only be done once in a 12-month period. The potential for tax and penalties makes this very risky and expensive unless you are certain you can redeposit the money within the time frame.

IRA penalty-free withdrawals may still be required to pay tax. IRA contributions are made with before-tax dollars and taxes are usually paid upon fund withdrawal. Remember this when borrowing these funds. But Roth IRA funds are after-tax contributions and there is no tax due when those funds are withdrawn.

You do not have to be the one shopping for a new home. You can tap into your IRA and qualify for the exemption if the monies will be used to help an eligible child, grandchild or parent buy a home. Even if you currently own a home.

Before you withdraw any money from an IRA, Roth, 401k, 403b or insurance policy, please seek the advice of a tax professional about your circumstance. If you do not have a tax professional, I would be happy to refer one to you. Contact me at (703) 303-4010 for more information.

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