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Withdrawing from IRA for first home down payment

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jbwaj
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Withdrawing from IRA for first home down payment  Reply with quote  

Hello,

My wife and I have about 35K in our IRA and we want to cash all of it for a down payment on our first home. Can we cash the entire amount and then claim that 20K was used towards down payment so that there will be a 10% penalty only on the remaining 15K? Is it better to cash the $20K and the remaining $15K in separate withdrawals?

Thanks

B
Post Fri Oct 30, 2015 5:43 pm
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oldguy
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Your $35k is a very good start for your retirement account, it means that you've already got half of your retirement needs finished. (More later)

For a first home, you can exempt up to $10,000 from the 10% 'early withdrawal penalty. But that is going to be a very costly down payment, it would be far better to find another way. From your text, I'll assume that you both work. That means that the Fed & State Income taxes on $35k will be in the $7500 range. And the 10% penalty on the remaining $25k will be $2500. Ie, your net will be only $25k.

I would borrow the $35k elsewhere at about 5%/yr, that costs only $1750/yr, way cheaper than taking a $10,000 hit.

Plus you would get to keep your $35k retirement fund. That's where your far-future money will be, $35k invested at the average longterm 11%/yr is $801,000 in 30 yrs. That should be protected, you should NOT derail that plan for anything. Instead, you'll probably want to ADD money to the $35k, incrementally, over your lifetime, to push the $800k over a million, or maybe $2M since that is what you'll need in the 2045 world.
Post Fri Oct 30, 2015 6:44 pm
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jbwaj
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Withdrawing from IRA for first home down payment  Reply with quote  

Thanks for your feedback. I have about 20K in my IRA and my wife has 15K in hers, so I think we can each get 10K without the penalty (total 20K). That means that the 10% penalty will apply on the remaining 15K. I realize that we are taking a hit in terms of taxes/penalties, but we have very few options for getting that kind of money.

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Post Fri Oct 30, 2015 6:53 pm
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oldguy
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quote:
but we have very few options for getting that kind of money.


My DW and I were very careful to avoid derailing our retirement plan - instead we borrowed for our near-term needs and gave priority to out far-future needs. When we retired (16 yrs ago) my 401k was about a million (much higher now, after 16 yrs of added growth). It's really not as difficult as you might think.

In simple terms - $5000/yr into an IRA @ 11%/yr for 30 yrs is $1,100,000.
And your $35k kept at 11%/yr for that same 30 yrs is also about $1,100,000.

If you can avoid derailing that Plan for 30 yrs, you will have the $2.2M.

Eg, we never pay cash for a car, when we need a $30,000 car we have 2 choices _
A. Sell $32k from our stock fund, use $2000 to pay the tax on profits,and $30k to buy the car. Or -
B. Finance the entire purchase including tax, license, everything. And sell the old car privately for $4000 and add that to the stock fund. So, that is $32k left in the Fund plus $4k. That $36k doubles about every 7 years (Rule of 72).

Same with houses - when we buy houses (rental houses) we shop for zero-down loans. Right now you can get 30-yr fixed rate home mortgages at under 4%/yr and for as low as 3% down payment. I would leave that $35k right where it is and deal fo a very low 'Down".
Post Fri Oct 30, 2015 8:53 pm
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