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My husband and I are hoping to purchase our first home within 2 years. We both have 401k's that we would like to rollover to IRA's. We plan to use the IRA money for our downpayment. My question is...should we invest in the traditional or Roth IRA for this purpose? My first inclination is towards the Roth, however, I don't fully understand the five year "seasoning" process and if that would negatively effect us since we are planning on using the funds within two years. Any help would be appreciated.
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Neither. If moving in two years, you will be penalized (assuming under age of 59.5) 10%, plus owe federal taxes (15%-25%-28%-33%-35%) and possibly state taxes (0-10%).
I would suggest doing an 80-10-10 finance before touching retirement funds. You can only roll 401k over if you change jobs as well. -
Thanks for your response. I thought that as long as the IRA was being used to purchase a first home the penalties were waived. Did I misunderstand that? I also thought that no taxes were taken out when withdrawing from a Roth because taxes are taken out when you put the money in to the account originally.
My husband did just change jobs so we have the option of rolling over his 401K and I stopped working after my last job where I earned my 401k so we are both in a position to roll over.Comment
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you will pay taxes when you convert 401k to Roth. 5 years later you could withdraw penalty free from contributions.
Maybe there is a qualification for removing money from a traditional IRA to buy a house, but you would still pay taxes on the withdraw.
The 401k money has not been taxed. Before you spend it, the government will tax it.
I would strongly reconsider using retirement funds for the house. Find another way to save. You have two years, you should be able to get enough for a down payment on an 80-15-5 or 80-10-10 program.Comment
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You can also look into loan programs. Generally you can borrow up to the IRS limit for a first mortgage. Check with your plan administrator.Comment
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I wouldn't generally recommend using retirement money either.
However, the ROTH rules are like this.
If you wait 5 years you can take out $20k, tax-free/penalty-free for a home. (Just FYI for others. $20k is for a married couple. $10k if single).
Before the 5 years you can take out whatever you put in to a ROTH, tax-free. The catch is you can not take out any of the earnings/appreciation from the account. That part is subject to penalties/tax. However, this only applies to new money you put directly into a ROTH account.
When it comes to your situation you have 2 problems. One, if you convert to a ROTH from a 401k, you will owe taxes on that conversion (as mentioned). Also, the rollover amount will be taxed and penalized, yes. It is treated differently than a direct ROTH contribution.
Traditional IRA is no better. No tax on rollover, but more taxes and penalties on withdraw.
Likewise, I don't think either option is good.Comment
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One comment on above- if the Roth was a conversion, the 5 year clock is on the amount of conversion from the day of the conversion. Meaning the principal cannot be withdrawn until 5 years and one day after the conversion.Originally posted by MonkeyMama View Post
Check me on this, but I looked into this earlier in year for another reason.Comment
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Whether you CAN do something and whether you SHOULD do it are 2 very different questions.
Should you spend your retirement savings to buy a home? NO, you should not.Steve
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To Jim - yes the 5-year rule is the same.
The thing is if you contribute monies directly to a ROTH, you can take that out any time tax/penalty free. You don't have to wait 5 years. But the rules are a little different on rollovers/converions. That was my point.Comment
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