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Answer:
Dear E. F.,
You have undoubtedly taken into consideration the fact that the market is cyclical in nature and as we pull out of the current recession, solid stocks are very likely to move up in price. If your portfolio consists of well managed companies that are not burdened by excessive debt, you might want to hold them for the long term. Then if you wish to sell some or all of your positions, ideally you will do so at a profit.
Weigh this thought against your IRA option, explained below.
The Early Withdrawal Penalty
When you take money out of an IRA prior to age 59½, it is regarded by the IRS as a “premature distribution.” So, in addition to any tax due on that money you will also be hit with a 10% penalty.
However, there are some exceptions and one of them may benefit you.
First-time Home Buyers
If you are a first-time home buyer, you can withdraw up to $10,000 from your IRA and use it to purchase, build or rebuild a principal residence without incurring the 10% penalty. If you are married and you and your spouse are both first-time buyers, then each of you can take out $10,000. (Normal income taxes on your withdrawal still apply.)
Even if you’ve previously owned a home, you may still qualify because the IRS ruling is quite liberal. And in fact, it need not be your very first home. In this particular situation, the IRS defines a first-time home buyer as someone who has not owned a principal residence at any time during the two years prior to buying a home.
The ruling about who can use the money is also quite broad. The withdrawal for a down payment can be used by you, your spouse, one of your children, one of your grandchildren or even a parent.
Caution: Don’t dip into your IRA too soon. Plan your withdrawal carefully. You must use the IRA money within 120 days of when you take it out, so be absolutely certain about your closing date.
Note: The penalty-free withdrawal does not apply to purchasing property that you then rent; nor can it be used for a second home.
The Roth IRA
You didn’t indicate if you have a regular or a Roth IRA. The rules outlined above apply to the traditional IRA. If you have a Roth, the $10,000 you take out for your first home purchase will be penalty free only if you have had your Roth for at least five years.
Good news… Because Roth earnings are tax-free, you will not be required to pay taxes on your withdrawal.
The Stimulus Package
Since we last discussed IRAs, the American Recovery and Reinvestment Act was passed. This $787 billion stimulus package could also directly benefit you and your real estate purchase.
The Act has given first-time home buyers a significant break – they are now eligible for an $8,000 tax credit. The credit, claimed on one’s federal tax return, is available to those who purchase a primary residence between January 1 and December 1, 2009.
In this case, the IRS defines a first-time home buyer as someone who has not owned a home for three years. And, unlike the $7,500 tax credit of a year ago, this one does not have to be repaid – unless you sell your home within three years.
The credit phases out for taxpayers whose Adjusted Gross Income exceeds $75,000 (for singles) or $150,000 (for married couples).
Details: Before withdrawing IRA funds, check the related IRS rulings with a professional tax preparer or accountant or at: www.irs.gov. (Type “homebuyers” in the search box.)
Good luck!
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