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Financial Planning / Tax Strategies
|Subject: Re: IRA withdrawal for 1st home purchase||Date: 5/20/2001 7:30 PM|
|Author: gailkay||Number: 51110 of 125421|
IRA withdrawal for 1st home purchase
I was considering using this option to finance my downpayment on a first home. Two questions:
1. Is it possible to use this $10K withdrawal for a home purchase outside the US (I am thinking of buying in Japan)?
Not really easy questions, as they are not directly addressed in the tax code, regulations, or publications available to us tax-types. That means we actually have to think, analyze and decide. <drat, and on a Sunday, too>
First, except for the part about buying in Japan, do you meet the requirements as outlined in Publication 590?
Individual Retirement Arrangements (IRAs)
Second, Internal Revenue Code Section 72 (which provides for the penalty exclusion for 1st time home buyers) states that the term "principal residence" has the same meaning as when used in section 121. Section 121 is the one that governs exclusion of gain when you sell your principal residence, and the regulations applicable to Section 121 define "principal residence" as the same as the definition used by Section 1034. Have I lost you yet? Have I put you to sleep? NO?
Okay, to make it short, none of these sections say the principal residence has to be in the United States.
However, Code Section 121 does deny the exclusion for expatriates, who within the past 10 years, expatriated with the primary purpose of avoiding income taxes. So, if you renounced your citizenship and moved to Japan so you wouldn't have to pay taxes, you are out of luck.
2. Are there any downsides to this withdrawal?
Yeah, you still have to pay tax on the amount withdrawn. The benefit is only the waiver of the 10% (federal) penalty for distributions before age 59 1/2.
And, you lose the tax-deferred growth of your money in the IRA. Will the non-monetary benefits of home ownership, and the appreciation of the value of the property compensate you for tax paid now and the loss of income growth?
I know nothing about purchasing property and getting financing on property in Japan. If you were doing it in the US, I would suggest that you use the IRA funds like a rollover. Take the money out just before you close, find other funds after you close so you can return the money to your IRA within the 60 day rollover window and you have no penalty and no tax.
You are left with paying interest on the $10k until you can pay it off. Can you afford it?
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