using IRA towards buying my second house..

[Guest SEW]

I am currently living in my first home.. I didn't use myIRA to purchase it... I've purchase some land and am planning on building my new home on it... I will sell this current home and use the equity to go towards the construction loan for the new home...

I am also considering using one of my IRA accounts to help bring down my mortgage payments. I will use this money to pay for the fence surrounding the property and a few other things. The property is five acres...

My questions are:

Will I be penalized for withdrawing the money?

Will I have to pay taxes on the money???

The way that I figure it... If I can use it to lower my motgage payments, I will save a lot on the interest in those payments...

Kind of like, using money from your savings account to pay off a credit card, instead of making those monthly credit card payments, only to keep earning 3.4% off your savings account...

Please give your input..

Thanks!

S. Wilson

[Appleby]

If you are under age 59 1/2, you will be penalized (10 percent early withdrawal penalty).

IRA owners are permitted to withdraw up to $10,000 from their IRAs, penalty free, is the amount is used towards the purchase of a first home. This is a once per lifetime limit.

The definition of a 'first home' is a primary residence purchased by an individual who has not owned a primary residence for the past two or more years.

You will also be taxed ( ordinary income tax) on the amount withdrawn, to the extent that it does not include a distribution of non-deductible dollars ( amounts representing non-deductible contributions)

[JAMES PATRICK]

If memory serves me right a first time home owner for IRA purposes is someone who has not owned their own home for 2 years. So that eliminates your chance of using that exception in order to NOT pay the 10% penalty for early withdrawal from an IRA.

If all your contributions were deductible than you will be taxed on the withdrawal at your applicable tax rate.

Unless you have an exception to the early withdrawal rules; 59 1/2, disabled, etc. than you would also pay the 10% penalty in addition to the regular taxes.

If all you are earning on your IRA is 3.4%in savings acconts C/D's you should consider talking to a financial planner.

[John G]

1. While paying off a credit card debt using savings account is ussually a smart thing.... you posed a different problem. Today mortgage rates are extremely low and generally are deductable. Normally most folks have their IRA assets in stocks, mutual funds, bonds or some combination of these and therefore expect much higher returns over the long haul then a savings account. For example, the long run annual return for stocks is in the 10-12% depending upon the mix of stocks and the historical time period you use. Bonds generally are in the 6-10% range depending upon the type (federal, state, muni, revenue, corporate, etc.).

2. Raiding your IRA is often a very bad idea over the long haul because you destroy the tax shelter before you get the full benefit of decades of tax free compounding.

3. Folks will give you examples of large total amounts of interest that is "saved" by paying down a mortage. Many of these examples are misleading because they fail to show any other scenario which would put the plusses and minusses in perspective. Mortages are essentially the cheapest money to which the average homeowner has access. Home equity, car loans, credit cards, etc. generally have much higher interest rates. Right now mortgage money is essentially "ON SALE". Don't you ussually buy of things on sales?

I agree with the prior comment that you should talk to a financial advisor: to get an informed answer on what you can and can not do with IRAS, and to give you some perspective on you personal finances.

If you want more advice here.... please specify your age, marital status, approx income or tax rate, and what kinds of investments you are actually making in your IRA.