Using Retirement Plan Funds For Buying a Property
The Internal Revenue Service has some specific restrictions about using your IRA funds on a pre-retirement basis; you might be surprised to learn that if you buy a second home using the funds from your IRA money pre-retirement there may be serious tax implications. In order to purchase a second home using retirement funds, certain conditions must be met to avoid penalties. One of these conditions is that you or your spouse has not met the $10,000 dollar lifetime cap on IRA withdrawals for a home. If one spouse has not used this allowance, and this figure is sufficient to meet the needs of your downpayment, there may be benefits to this type of investment.
If one spouse has not made a qualified distribution from an IRA account for the purchase of a home, then the IRS does allow that spouse to draw from their IRA funds to invest in a second home. It is important to note that the qualifying spouse may neither have used more than $10,000 previously to purchase a home, nor are they allowed to have ownership in another property for the two years prior to this distribution.
Notwithstanding these conditions, there are still more restrictions that must be considered. One of these restrictions includes who the seller of the home is. There must be no direct relationship between the seller and the buyer; in other words, withdrawing funds from an IRA to purchase a second home from a parent or child is disallowed under IRS rules and thus is a taxable distribution.
Another possible method of using IRA funds to purchase a second home is to borrow money from your IRA account and deposit it back in the account within 60 days. This is helpful if there is a lot of equity in either the primary residence or the second home that you are considering purchasing, and you can secure a second mortgage or an equity line of credit.
Double Taxation Problems
Most people who invest in an individual retirement account do so to ensure their financial future. The Internal Revenue Service encourages this type of investment and punishes those who use pre-retirement dollars for purposes other than retirement. One thing that many people overlook is that the Internal Revenue Service cannot prevent you from withdrawing funds from your IRA for any purpose. They can, however, make the tax burden sufficient to discourage this type of withdrawal.
When trying to discover can you buy a second home with ira money, pre retirement, the easy answer is yes, provided that you are prepared to pay the penalty for doing so. The Internal Revenue Service imposes a 10% penalty on all early withdrawals (typically this penalty is withdrawn from the requested amount) and they then impose an additional 10% tax on the withdrawal. These penalties may be avoided provided that they meet the requirements for qualified distributions.
For those who are considering a liquidation from their IRA account in order to purchase a second home, it is generally a good idea to speak with a financial advisor. Before you make this type of a withdrawal, you should explore other options as well as make sure that you fully understand the tax penalties that are associated with this type of transaction.
- Internal Revenue Service
- Tax Topic 557 https://www.irs.gov/taxtopics/tc557.html
- Publication 590 https://www.irs.gov/publications/p590/ch01.html#en_US_2010_publink1000230930
- Bob Parrish CPA, P.C Tapping your IRA Penalty-Free https://www.pro1040.com/Retirement_plans_retirees/IRA_Pre_Retirement/ira_preretire_draw.htm