Author Topic: Using traditional IRA to save for a down payment on house  (Read 2671 times)

av

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Using traditional IRA to save for a down payment on house
« on: October 07, 2013, 12:56:10 PM »
Hi, I need advise for the following situation:

I'm planning to buy a house within the next 0.5-2 years. I'll be first time home buyer and have 0 savings in IRA or 401k.

This year I'm thinking to put 10K in two traditional IRAs (5K on my account and 5K on my wife's). If don't buy house next year I'll put 10K again. I may or may not need that money for a down payment on house.

If I don't need that money when buying house - I save 25% on taxes and keep these accounts till retirement.

If do have to use them to buy a house, I loose nothing* as first-time homebuyers are able to use $10,000 of their traditional IRA funds towards the purchase of a new home, without incurring a 10 percent penalty for taking the money before the age of 59 1/2.

* it's very unlikely that in next couple years my family income will reach 28% tax bucket. But even if it does so, it would be still just a 3% loss. So looks like an easy choice between more probable 25% saving vs. less likely 3% loss.

What do you think about such strategy? Are there any other drawbacks?

scarab007

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Re: Using traditional IRA to save for a down payment on house
« Reply #1 on: October 08, 2013, 10:45:49 AM »
Do you have any savings at all? 20% down on the home? Doing FHA, VA?

What type of debt are you holding, currently?  Personally I like to separate my savings from retirement accounts. If I am saving for something such as a home, I put in different accounts that can easily be accessed.  Also, if you invest it and you will have market fluctuations, then that 10k could be a less. 

If you open an IRA and put money, leave it. If you're saving for a house, put the money in another place. 

av

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Re: Using traditional IRA to save for a down payment on house
« Reply #2 on: October 08, 2013, 01:24:30 PM »
Do you have any savings at all? 20% down on the home? Doing FHA, VA?

What type of debt are you holding, currently?  Personally I like to separate my savings from retirement accounts. If I am saving for something such as a home, I put in different accounts that can easily be accessed.  Also, if you invest it and you will have market fluctuations, then that 10k could be a less. 

If you open an IRA and put money, leave it. If you're saving for a house, put the money in another place.
At this point I don't know if I'll have 20% down payment without these 20K. Since traditional IRA allows to withdraw without penalty upto 10K per person for first time home buyers, it doesn't look any riskier for me to put these 20K into IRA money market fund than into bank savings account. And if I end up buying cheap house and don't need these 20K for down payment I save 25% taxes.
I haven't found anyone else mentioning doing the same, so curios maybe I missed something else.

matchewed

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Re: Using traditional IRA to save for a down payment on house
« Reply #3 on: October 08, 2013, 01:38:40 PM »
Yes there is risk associated. I'm assuming you'd pick some investment other than a money market if you decide on the IRA path. That other investment has a risk of losing you money in the short term. The savings account does not.

I say make up your mind with what plan you and your wife want to pursue. If, as you state, you want to buy a house in the near future then put that money right into a savings account. It will be more accessible for the down payment.

Kira

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Re: Using traditional IRA to save for a down payment on house
« Reply #4 on: October 09, 2013, 08:08:51 AM »
One thing that you may not be counting on is the tax hit - you will be able to avoid the 10% early withdrawal penalty if it's for a house, but you would basically be adding $20k in income that year which could end up costing you more than the amount you saved in taxes putting it in there in the first place.