ROTH IRA funds to purchase a home
I wish to minimize the amout of money taken out of my ROTH IRA to purchase a home.
I have a ROTH IRA for over 5 years and I am over 59 1/2 and a TRAD IRA (also over 5 yrs old).
If I take money out of my ROTH IRA to puchase a home, then take out a loan from a bank using the home as collateral and put that money back into my ROTH within 60 days my understanding is the following:
1. the portion of the money not returned (to ROTH IRA) within 60 days will be considered a distribution (not taxable and no penalties).
2. my monthly mortgage payment taken out to pay for the loan from my TRAD IRA is taxable , but no penalties.
Am I correct?
Permalink Submitted by Alan Spross on Mon, 2010-08-30 03:21
Yes, that is correct.
Be sure you have not done another Roth to Roth rollover within the last 12 months, because you must wait for a year to do a second such rollover.
If the home purchase falls through after your Roth distribution and the purchase meets the requirements of a first time homebuyer, you have 120 days to re deposit the money into your Roth IRA, and that rollover does not count toward the one rollover limit per 12 months.
Permalink Submitted by Frank on Mon, 2010-08-30 04:19
Thank you for your reponse.
It was my understanding that money taken out of an ira had to be placed back into the ira within 60 days not ot be considered a distribution, not 120.
Also, if I move my roth ira account from (ie; etrade to schwab), is that what you mean by a Roth to Roth rollover?
Permalink Submitted by Alan Spross on Mon, 2010-08-30 04:38
The 120 day rollover period only applies to distributions taken for a “first time homebuyer”. It does not apply to other home purchases and I edited my last post to clarify that. All other IRA rollovers must be completed within 60 days. The 120 day period is a special case situation. I don’t know whether your purchase meets the definition of a first home or not. You cannot have owned an interest in a main home for the prior two years to qualify.
With respect to the one rollover limit per 12 months, this limit applies only to INDIRECT rollovers where you actually receive the funds. There are no limits on the number of direct transfers between IRA custodians and this is the best way to change your account custodians (per your example of e trade to Schwab). With an indirect rollover you can actually use the funds for any purpose you want and still get the funds back into your IRA as long as you complete the rollover within 60 days. The reason I mentioned a “Roth to Roth” rollover is because if you do a Roth conversion which is from a traditional IRA to a Roth IRA, these also do NOT count toward the one rollover limit.
Permalink Submitted by Frank on Tue, 2010-08-31 01:12
A different scenario.
If I choose to purchase a house within my ROTH IRA then,
1. at a later date, title it to myself and
2. borrow against it and put that money back into the ROTH IRA all within the 60 day period.
Am I correct that the only amount not returned (based upon the appraised value of the property), will be considered a distribution, and
I can take taxable distributions from my TRAD IRA to make the mortgage payments.
Permalink Submitted by Alan Spross on Tue, 2010-08-31 03:25
This one is a no -go.
Rollover rules require you to complete the 60 day IRA to IRA rollover with the same property distributed ie. the house. You cannot distribute the house, encumber it and then roll the cash back into the IRA. You also cannot sell the house and roll the proceeds back to the IRA.*
If your IRA (Roth or TIRA) purchases property, it must be investment property. It cannot be property you use (eg live in) or you will have a prohibited transaction. If your IRA purchased a rental and you kept it without making any prohibited transactions until your Roth was qualified, your net rental profits plus the value of the property could eventually be distributed tax free. But in the meantime you do not get any of the real estate tax preferences, such as deductions of taxes or depreciation of the property.
* Note that distributions from qualified retirement plans have more options. If you distribute stock shares from your 401k, you can sell the shares and deposit the proceeds as an IRA rollover. The sale of the shares could produce a gain or a loss, but whatever amount received is the amount that can be rolled over.
Permalink Submitted by Richard Escamilla on Mon, 2011-02-14 21:16
Hi,
The scenario is this:
Client is 35 and purchased his home 5yrs ago (30yr mortgage). He never used a Roth for this purchase or any IRA. He recently opened his Roth about 1yr ago. Can he still use Roth funds to purchase a new home and not pay 10% penalty fee?
What if he uses the Roth to purchase home under the 5yr mark? Will there be tax consequences if he only uses the principle he put in?
Thanks
Permalink Submitted by Alan Spross on Mon, 2011-02-14 23:13
Anyone can distribute their regular contributions to a Roth IRA tax and penalty free at anytime for any reason.
The only difference for a first home buyer is that if he has held his Roth for the 5 years, then his earnings in the Roth can also be distributed tax and penalty free up to 10,000 because they are then considered qualified distributions up to the amount shown. There is no reason to report qualified home purchase expenses on the Roth distribution portion of the 8606 unless there is a benefit from doing so. If you show these expenses with no benefit, the IRS will assume you used them and will count them against your 10,000 lifetime limit.