12 September 2007
Foreclosure doesn't just happen to people who don't make their mortgage payments. Your homeowner's association (HOA) can take your house or condo if you're not careful. In one case, a disabled California man lost his home in a foreclosure sale because he was $123 behind on his homeowner's dues. The house was worth $280,000. Unfair? Abusive? You bet!Read More »
Funding Mortgages with Retirement Funds
By Kelly WingardNFNS Columnist
Accumulating money
for a mortgage down payment often delays a first-time home purchase. Unless a
homebuyer puts down 20 percent or more of the home's purchase price, mortgage
companies usually require private mortgage insurance (PMI). Many buyers turn to
retirement accounts to finance down payments on new home loans and avoid PMI,
but careful consideration should be given before tapping into these funds.
Loans vs. Withdrawals
Homebuyers have two options for raiding their retirement
plans: loans or withdrawals. Withdrawals are permanent disbursements that
cannot be replaced into tax-sheltered accounts. Taxpayers must include the
amount disbursed in gross income and may be subject to an additional 10 percent
penalty for early withdrawal.
Loans are not included in taxable
income and are not subject to the 10 percent penalty as long as they are repaid
on time. Employees usually repay their 401(k) loans, plus interest, through
automatic payroll withdrawals. Interest rates vary, but generally they are a
point or two above prime. An employee who terminates employment before a loan
is fully repaid must pay taxes, and possibly a penalty, on any unpaid balance.
IRA and 401(k) Differences
Although IRAs and 401(k)s are
both tax-sheltered retirement plans, they are not treated equally when funding a
mortgage. Homebuyers can borrow from their 401(k) plans to finance a new home
loan, if their plan permits borrowing. Loans against IRAs are prohibited by law.
However, IRAs offer a distinct tax
advantage over 401(k) plans: An IRA account holder can withdraw up to a
lifetime maximum of $10,000 to finance a first-time home purchase. Although this
withdrawal is subject to tax, it is exempt from the additional 10 percent
penalty. There is no comparable exclusion for 401(k) plans, but it may be
possible to roll funds into an IRA to receive this advantage.
Sources:
Internal Revenue Service
401k
Helpcenter
Kiplinger.com:
Borrowing from 401k for a Home Purchase
About the Author
Kelly Wingard is a
freelance writer and a 25-year veteran tax preparer. She contributes regularly
to the University of Illinois Tax School training manual for tax professionals.
About the Author
Kelly Wingard is a freelance writer and a 25-year veteran tax preparer. She contributes regularly to the University of Illinois Tax School training manual for tax professionals.