In the year 1974, the Congress passed the Employment Retirement Income Security Act, which has established the Individual Retirement Account. This allows the employees to make their own individual retirement arrangement.
What is self directed IRA?
The enacted law allows you to have your own IRA account and have control on how the money is to be invested. It allows the account owner to make investment on bonds, stocks, mutual funds, real estate and many more. This means that you can use it to fund down payment if you intend to purchase a house and you are a first time home buyer. With Roth IRA, you can withdraw the contributions without being penalized for early withdrawal and it can also be taxed free provided certain conditions are met.
Qualifiers for withdrawal without tax
Foremost, the withdrawal to be made must not be $10,000, which is considered as the lifetime limit. This means that if you do it now, you cannot do it again in the future. It is also required that the holder of the account, who will withdraw, must not be more than 52 1/2 years of age and who has not owned a house for at least 2 years. It is also required that the property that will be purchased must be used as the principal residence and it must be bought within 120 days from the time that the IRA money was withdrawn.
You may also withdraw the IRA money for a spouse or child who is a first time buyer of primary residence. Generally, you need to pay income tax on the distribution itself. In order for the investment money to be tax free, its funds must be held in account for not less than five years. It will also be free from taxes if you should be able to pay back the IRA money withdrawn within 60 days from the time it was removed from the account. This is the strategy known as roll over when such money withdrawn will not be considered as distribution for taxation purposes.
Advantages and disadvantages of using the IRA money as down payment
When you withdraw your IRA money, this would mean that it can no longer be used for other investment. In addition to this, the distribution of that amount might bring you to higher tax-bracket if it will be combined with your other income. On the positive note, the withdrawn amount, which is maximum of $10,000, can be a huge contribution to your down payment. This could mean that you will dispense with payment of private mortgage insurance or PMI over the entire period of the loan.
Guidelines in the use of IRA
Your decision to take your IRA money to be used as down payment largely depends on your personal circumstances. It is highly advisable that you consult a tax accountant or a certified public accountant before finally raiding your IRA account. They have the knowledge and expertise which can help in determining if this financial decision will work to your advantage.
John Lewis is financial lead at Funding Grants is Private Funded Company, who provides grants Australia-Wide to both business and individuals. It specializes in fast finance lending mainly using online services which is faster easier and safer.