Please help me with basic ROTH ira question

[Goldy1]

I am set to close on a house july 29.

I am supposed to close on my current home same day

I got word my deal with buyers on my home might fall through. (they won't get loan to buy my house)

We wanted to put the entire amount of equity from current home on new home.

We won't have that money if deal falls thru.

we still want to buy new home and sell current one after we move. (my current home is paid off so no double mortgage but it will still be hard but doable temporarily)

We are looking into taking money out of retirement. roth or 401K for down payment.

we don't have enough cash for down payment.

Two places told me we have to pay 10% penalty on taking my after tax money out of roth before 59 1/3. we are much younger.

I thought roth ira money was able to be taken out whenever I want minus the interest it made penalty free!!!
That's why so much of my money is tied up there!!! I thought I could get it if needed. paying 10% penalty is insane!

[greenskeeper]

10% penalty is true

do you get to keep the deposit if the buyer backs out?

I would hold off until your current house sells and not mess with retirement over a new house.

[disneysteve]

Two places told me we have to pay 10% penalty on taking my after tax money out of roth before 59 1/3. we are much younger.

I thought roth ira money was able to be taken out whenever I want minus the interest it made penalty free!!!
That's why so much of my money is tied up there!!! I thought I could get it if needed. paying 10% penalty is insane!

You are correct. You can withdraw your contributions (not any earnings on that money) without penalty at any time for any reason. The 10% penalty is only if you withdraw more than you've contributed. So if you've put in $5,000/year for 10 years, you can withdraw up to $50,000 but no more regardless of the current balance of the account.

All of that said, this is a HORRENDOUS idea!!! If you can't afford the new house until you sell the old house, DON'T BUY IT! Wait until the old house is sold.

[Goldy1]

I'm selling my house for 195k and paying 5 grand of their closing costs.

I am buying a new home for 254 K
My current home is paid off
I will get 175K after taxes and realtor fees from my new home. so I am mortgaging only about 75K
I'm not getting crazy. lol
just don't have more than about 9 grand or so in the bank. I put my money in roths thinking it was just like the bank;get it when I want it!!!!!!

I'm getting a better neighborhood with much better schools for my child at a good price. home is totally updated. no updating needed. (so is current home tho) I found a gem here. a rare gem. the new neighborhood costs more.

my buyer is fha;I goet no money if deal falls thru.

I am conventional=I lose 3 grand good faith money and I am renting storage now too so would be out over 4k after appraisel etc if I don't buy and I want to move.

My deal might still be good. just need to prepare for worst.

[Goldy1]

just hearing I lose 10% of money for any roth money taken out. looks like new 2011 rules. getting conflicting advice.

[Goldy1]

we have about 100K in 401K/
looking into loan from that. sounds complicated.

what a debacle!! lol

[bjl584]

we have about 100K in 401K/
looking into loan from that. sounds complicated.

what a debacle!! lol

You can take the needed money from the Roth as long as you take contributions only. Anything above that and you will get hit with the penalty.

Don't touch the 401K.

[disneysteve]

You can take the needed money from the Roth as long as you take contributions only. Anything above that and you will get hit with the penalty.

Don't touch the 401K.

Agree 100%. Don't touch the 401k. Not a loan and certainly not an early withdrawal (which will cost you more like 40% between penalties and taxes).

[Petunia 100]

While you can take your Roth contributions out with no penalty, you can never replace the money. You will forever lose tax-free compounding of those dollars.

I think a far better idea is to open a HELOC on your existing home and borrow the money you need to close on the new house. You can pay off the HELOC when you sell the house.

[Like2Plan]

Goldy1,

You can look up the rules for Roths on the irs website

"Are Distributions Taxable?

You do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s). "


IRS website pub 590

The key here is regular contributions. If you did something different --like a series of rollovers to a Roth from a traditional, there are ordering rules for distributions which are dealt with a little differently (this is covered in the same publication).

But if you just made regular contributions to a Roth, I don't see where you would get penalized for taking out your contributions in the IRS publication linked above...

[autoxer]

Goldy1,

You can look up the rules for Roths on the irs website

"Are Distributions Taxable?

You do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s). "


IRS website pub 590

The key here is regular contributions. If you did something different --like a series of rollovers to a Roth from a traditional, there are ordering rules for distributions which are dealt with a little differently (this is covered in the same publication).

But if you just made regular contributions to a Roth, I don't see where you would get penalized for taking out your contributions in the IRS publication linked above...

Read the part about Qualified Distributions. If you are under 59 1/2 and you contribute or rollover money, it must remain in the ROTH for 5 years, before it will be considered Qualified and therefore avoid the 10% penalty. There is also an exception for withdrawing by the due date of that years contributions. So you can access any contributions penalty free if they have aged for five years or more, or if they are the current years contribution withdrawn by the due date.


Goldy1, Can you get a HELOC on the old house to cover your downpayment on the new one? Then you can just pay it off when it sells.

[MonkeyMama]

While you can take your Roth contributions out with no penalty, you can never replace the money. You will forever lose tax-free compounding of those dollars.

I think a far better idea is to open a HELOC on your existing home and borrow the money you need to close on the new house. You can pay off the HELOC when you sell the house.

Very much agreed!

We did the same when we bought our current home and could not sell last home. We did a HELOC to borrow the down payment out of our first home and to put it onto our second home. I would do that and/or a 0% credit card deal before messing with ROTH money.

Caveat: We could not refinance our house while it was on the market or in escrow. I do not know if HELOCs have the same rules. (We were not sure how long it would take to sell so we also did a refi in conjunction with our HELOC. To lower the payments as much as possible.)

We did go with the HELOC because it just made the most sense. Your lender might push a bridge loan, but we did not like the terms of the bridge loans. Seems there were so many other better options for a short-term loan.

[creditcardfree]

I agree with the HELOC idea! Call today to find out if that will work.

[Goldy1]

Thanks guys. I really don't want to touch the 401K. just sounds insane

We put money into roth bc we got a nice tax credit for doing so since our earnings are not that high.
now I see they can change rules. I won't be putting money in roth thinking it's an emergency fund anymore!

Most the contributions are over 5 years old.

My house is pending status now. it's technically off market. I'm waiting to close. might also look into loan from parents, but not sure if paperwork involving "gifts" would be involved.
still hoping to close the deal but have to prepare.

[Goldy1]

401K is for my old age! lol