Roth IRA Withdrawal & Subsequent Contribution

[Guest lumbarpuncture]

Thanks in advance to any who help out.

My wife and I are purchasing a home (we are not first-time home-buyers). We currently have about $4000 in savings, but closing costs are $9000. Our lender will not allow us to use other forms of credit to finance those closing costs. They will, however, allow us to remove money from our Roth IRA to pay the $5000 balance. January 1st of this year, I will start a new job and receive a nice bonus. I plan to use that money to replace the Roth withdrawal. In essence, I want to take a temporary loan out against my IRA. I would be withdrawing ~ $5000 and replacing it less than 4 months later. We have contributed more than $5000 to the IRA's, so there's no penalties on withdrawal. We have contributed $3000 each to a Roth this year. What I am worried about is that since we have already contributed the maximum that we would then not be able to replace the money we withdraw. Any idea what the rules are on quick removal and replacement of funds?

Thanks again!

[BPickerCPA]

You must replace the money withdrawn no later than 60 days after the date of the withdrawal. If you miss the 60 day deadline, all you can do is continue to make annual contributions for each year that you are eligible.

[Guest lumbarpuncture]

That sounds about right, but I note that you have 120 days if you take out money for a first home and don't complete the purchase. Are the rules different in this case? Are there any special forms to fill out, or do I just withdraw funds and quickly redeposit them?

Thanks for your help!

[BPickerCPA]

The rules ARE different for first time home buyers. However, by your own admission, you do not qualify. (Note that under the law you are a first time home buyer if you haven't owned a home for two years, even if you're not technically buying your first home.)

[John G]

You need to think creatively about this timing problem. Perhaps there is someone in your family that will provide funds for a short period - someone who is getting 0 to 1.5% right now (mom, dad, uncles, etc.). This person would provide the mortgage company with a "gift letter", something that is done hundreds of times each month. You could use the money in your IRA initially, but take a short term loan AFTER you buy the house to repay the IRA within the 60 limit. I am puzzled by the closing cost amount - you can often get a range of deals which mix points and interest rates so perhaps there is something option based upon the type of mortgage you chose and you might be able to find a lower closing cost option.

Can you get a home equity loan on your first house if it is not yet sold? You might even be able to talk your new employer into helping your out - as a loan (which does not trigger 2003 taxes). It sounds like you are moving because of a new job - did you ask for moving expenses... sometimes employers will provide a flat dollar amount that could be applied to replenishing your IRA. There are tons of "free" credit card applications in my mailbox every week. Some even allow you to take an advance interest free for a brief period. The mortgage company is concerned about your closing, they have nothing to say about what your do the following days. Can you shift the closing date further back in the year? If closing is a while off, can your spouse work to pull some extra money? Your problem is of manageable size and I think you will find a way to solve it.

All of the above are aimed at your original question. Before I end this note, I want to say something about my concern about the minimal reserves that you have accumulated. You did not say if both of you work, your income, other assets, or debts... but $4,000 is a very small amount of money to have in reserve and it sounds like it will be gone after this transaction. Perhaps you are using your Roth's as a reserve - but look at the problems not having a reasonable amount of cash reserves is causing on the home purchase. There are a lot of unpredictable events that would eat through 4k in a day. You probably need to get more aggressive on building up your cash reserves. This is even more true if you are carrying any balances on credit cards. After you buy a house, there are usually a lot of extra expenses to get up and running. You look stretched awfully thin - perhaps saying no to some purchases, vacations, etc. can get you to a better financial position.