Which IRA to save for home purchase?

[Guest gszczyrb]

I am 27, and will likely be leaving my current job. Upon leaving, I have the option to rollover my retirement earnings into an IRA.

I do not yet own a home and would to have the OPTION of using part of my retirement as a down payment on a house. I understand that one of the allowable hardship withdraws is for the purchase of a new home. However, I am not clear on how this works exactly.

Does this work with Both a Traditional IRA and a Roth IRA?

Do I have to wait 5 years before making any hardship withdraws?

Anything else I should be aware of?

[Michael Devault]

If you roll your retirement distribution into an IRA, you will ultimately have to pay taxes on the funds when you receive them. In addition, you'll have to pay a 10% penalty if taken before age 59-1/2, unless another exception is met. One of the exceptions to the penalty is distributions for first time homebuyer expenses. Qualified first time homebuyers can have up to $10,000 distributed during their lifetime for those expenses without the 10% penalty being imposed.

There's no time restrictions on a traditional IRA. However, on a Roth IRA, you have to wait 5 years before first time homebuyer distributions become an exception to the penalty.

Also, if you're thinking about a Roth IRA, you need to know that the money will first be put into a traditional IRA, then you can convert it (assuming you meet the AGI requirement for converting). Upon conversion, the amount converted will be taxable, but future growth may be income tax free.

You may want to download a copy of IRS Publication 590 from their web site. It has lots of information that may be useful to you.

Hope this helps. Good luck!

[John G]

As a first time homebuyer, you have a range of programs that may be applicable independent of the IRA approach, depending upon where you live and your income level. Ask around. Some towns offer very attractive loans to first time buyers with modest incomes.

Have you considered internal family financing for the downpayment and leaving the retirement funds sheltered? For example, grandma has a CD that is paying her 5% while you might be able to pay her 7%. Some creative approaches might let it work to the advantage of both parties.

If you are just starting to think about buying a house, you might want to create a separate account to build toward that day. If you invest in a tax efficient mutual fund or an index fund, you would have minimal tax impact until you cash in. At that time you would have long term capital gains at a max rate of 20% under current rules. You should consider this route if your house buying is 4 or more years away.

[This message has been edited by John G (edited 03-27-2000).]

[BPickerCPA]

Michael,

You do NOT have to wait five years for a penalty free withdrawal for a first time home purchase. You can get that the very first day, as you can get any other penalty exception (medical, disability, death, et al).

If you wait five years, you can get earnings tax free for a first time home purchase. Perhaps that was the confusion.

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Barry Picker, CPA/PFS, CFP

New York, NY

[Guest dr.ic]

I'm a 28 yo med student interested in purchasing a roth ira, but will probably want to buy a house in the future and use the 10,000 withdrawal. However, I am under the impression to do this one must be a first time homeowner. What is the exact definition of first time homeowner?[

[This message has been edited by dr.ic (edited 03-27-2000).]

[Guest gszczyrb]

Thanks everyone. Your assistance is much appreciated. Thanks especially for the hint to look at the IRS website. Sometimes the answer is so obvious.

[John G]

In addition to the IRS site, you will find a wide range of topics at the www.rothira.com web site.