The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: LouGreen on July 06, 2016, 11:07:38 AM
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Hi all!
We are closing on our first house at the end of the month. I thought I remembered reading somewhere that I can cash out my IRA without penalty if I use it for a first-time home. I have $2k in a Vanguard traditional IRA that I rolled over from an old 401k plan that I'd like to use. Can someone verify if this can be done?
Thanks!
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You can do it, but there are a few things to be aware of:
1. You will pay taxes on whatever you take out at your marginal tax rate. Assuming you're in the 25% tax bracket, $500 goes to Uncle Sam.
2. You must use the funds within 120 days of withdrawing them, or you will pay a 10% penalty on the funds. Make the withdrawal at the last possible second to ensure you use the funds in time.
3. That is money you can never put back into a tax sheltered account. If you only have $2000 in your IRA and need it for a home purchase, I'm not sure you're ready to buy a home. Do you have an emergency fund? Extra savings somewhere in a taxable account? Any other retirement savings? Houses are expensive, and taking tax deferred money from your future self to pay for one is a questionable way to start off.
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Thanks!
Yep, I have 6 months of an ER fund, 20k in VTSAX, and a hefty good chunk in my retirement accts (401k and SEP-IRA). I don't need the 2k for the house, just wanted to think through all my options!
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You can withdraw up to $10K from your tIRA, or any IRA, exactly once in your lifetime; but it must be for a "first time homebuyer", which can either mean that it is actually the first home you have ever bought, or you haven't owned any real estate property in the past 2+ tax years; depending upon who you ask (IANAL). Either way, if you have owned a home in the past 2 years and you try to do this, you will end up with a 10% penalty. If you ever try to do this again, in order to get the other $8K, you will end up paying a 10% penalty.
Don't do this.