From the Mailbag:
Thanks for writing this excellent blog. I am one of the fortunate few sitting with 80% of my IRA in cash over the past 9 months or so. My wife and I are house hunting and since we want nothing to do with the stock market or mutual funds right now, we were wondering if we could just use the cash in our IRA accounts toward the purchase of a new home (we’re renting now).
Elliot in NYC
Hi Elliot, lucky you to be in cash and thanks for reading The Reformed Broker. Although I don’t give tax advice as a rule and I certainly don’t want to go all Suze Orman on this site, your question brings up an important point about IRA accounts and I think I can help you…
The answer to your question is, yes, you may take out money from your IRA to buy a house under certain conditions, but you probably shouldn’t…let me explain. For the purpose of this post, I am going to assume that both you and your wife have Traditional IRA’s as opposed to Roth IRA’s, which could make things more complicated.
The tax penalty for early withdrawal from an IRA (meaning taking money out before you turn 59 1/2 years old) is 10% of the withdrawal amount you take. You should avoid this penalty like the plague.
There are, however, several exceptions and exemptions to the early withdrawal tax.
These include college tuition costs for you or a dependent, the occurrence of an accident that causes a major disability, medical bills that exceed 7.5% of your adjusted gross income, or a court order stemming from divorce or bankruptcy mandating that payments be made which you are otherwise unable to (you can withdraw cash tax-free to pay off an IRS settlement or alimony and child support).
One other exception to the penalty is for when you are buying a home (having not owned one for at least two years prior) and you have never used IRA money for this purpose before. The exemption is basically meant for first-time home buyers and under it, you may use up to $10,000 of the money you have in your IRA. You can only do this once in your lifetime.
I don’t love the idea because even without the 10% early withdrawal penalty, you are still going to pay income taxes, just like you would at 70 1/2 when you start receiving your required minimum distribution, but your bracket now is way higher than it will be in retirement. Let’s assume that at a minimum, you’re in the 28% federal tax bracket. Compound this with the fact that you’re a New Yorker, so you’ve also got state and local taxes that are obscene. When all is said and done, the $10,000 coming out of your IRA becomes more like $6,000 before you know it, and how much help is 6 grand when buying a house these days.
My feeling is that it’s not worth the paperwork to withdraw that amount if you can help it. You’re probably better off letting it grow or throw off tax-deferred income for another few decades. Besides, heaven forbid you actually have a hardship where you really need that money! Keeping it in your IRA will give you a bit more peace of mind.
Good luck with the purchase of your new home. For more detailed advice on the tax ramifications of early withdrawal exceptions, talk to a qualified accountant.
Joshua Morgan Brown
VP Investments/ Branch Manager NYC
Westrock Advisors, Inc.
Author’s Note: Should you wish to discuss opening a new IRA account or rolling over an existing one, call me at 1 800 325 6195 for a confidential consultation or send an email to email@example.com.