Having a solid retirement plan should be a part of every person’s planning. Conventional wisdom states that cashing out a retirement account to purchase real estate or increase your down payment is risky.
But, for the person who has good credit and income but not enough money for the down payment to purchase a Kalamazoo area home, their qualified retirement program could offer them some help without sacrificing the long term plan! The rules are different depending on whether it is a 401(k), a Roth IRA or a traditional IRA.
Up to half of the balance of a 401(k) or $50,000, whichever is less, can be BORROWED by the owner at any age for any reason without tax or penalty assuming the employer permits it. There can be specific rules for loans from 401ks that would determine the repayment; interest is usually charged but goes back into the owner’s account…so you are paying YOURSELF the interest instead of paying the bank. You can consult with your HR department to find out the specifics. At the same time do not forget about the professional consultation some homebuilding companies provide (apply to the contemporary builders in Melbourne, etc).
Borrowing money from any source carries risks and borrowing money from your IRA to buy a greater Kalamazoo area house also has some risks to be aware of. One risk in borrowing against a 401(k) comes if your employment ends before the loan has been repaid. The loan may have to be repaid with as soon as 60 days to keep the loan from being considered a withdrawal and subject to tax and penalty. Even if you continue with the same employer, failure to repay the loan could be considered a withdrawal also.
Roth IRA owners can withdraw their contributions tax-free and penalty-free at any age for any reason because the contributions were made with post-tax income. After age 59 ½, earnings may be withdrawn as long as the Roth IRA have been in existence for at least five years.
Traditional IRAs have a provision for first-time buyers which include anyone who hasn’t owned a home in the previous two years. A person and their spouse, if married, can each withdrawn up to $10,000 from their traditional IRA for a first-time home purchase without incurring the 10% early-withdrawal penalty. However, they will have to recognize the withdrawal as income in that tax year. For more information, go to IRS.gov.
Another interesting fact about this provision is that the taxpayer making the withdrawal can help a relative includes children, grandchildren, parents and grandparents.
If you want more information to clearly understand the issues involved relative to your specific situation, talk to your tax professional or consult www.IRS.gov. If you are ready to start looking at homes, contact the Veenstra Team or call us at 269-350-5514. We will provide the best tools on the market and will provide you with 5 star service and guidance throughout the process.