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I thought I once heard that a person could invest their IRA dollars in a home (primary residence in this case), and then pay the IRA back with interest. Does anyone know if this is possible? I have a call in to my accountant, but I thought I'd ask here as well.

Thanks
codecraft@excite.com
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Yes, but it is not smart for several reasons...

You are allowed to "borrow" from your IRA (or 401(k) for that matter) to purchase your home. You are in fact paying yourself back with interest. However, the reasons it is a disadvantage are the following:

1) You can not write the interest off on your tax return.. The interest being paid to your IRA is not considered Mortgage Interest so you lose this great tax benefit.

2) Your interest is taxed twice. The interest that you are paying back to your IRA or 401(k) is post-tax dollars. That money will be taxed again when you finally withdraw it later in life.

Good luck,
the hendrys

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I should add a 3rd major disadvantage if it is done from a 401(k) - instead of an IRA.

3) The loan can be demanded to be paid in full if you leave your employer.

If you borrowed $50,000 from your 401(k), and you leave your employer, the entire re-payment is called for when you leave. If you don't have the money to pay back, you may find yourself needing to take out a loan from a bank to pay your 401(k) back - which defeats the purpose of the original loan.

I realize this doesn't relate to your question, since you are thinking of doing it with your IRA, but I wanted to post it - in case others are considering the same strategy with their 401(k).

Good luck, all
the hendrys
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Greetings, wjh2010, and welcome. You asked:

I thought I once heard that a person could invest their IRA dollars in a home (primary residence in this case), and then pay the IRA back with interest. Does anyone know if this is possible? I have a call in to my accountant, but I thought I'd ask here as well.


The Hendrys described what you may do from a 401k plan. You cannot do that from an IRA, only from something like a 401k plan that allows loans. With an IRA, you may take a once in a lifetime $10K distribution without penalty for the purposes of a first-time home purchase. That money cannot be returned to the IRA. And to qualify, the purchase must be for your primary residence and you must not have owned a home in the past two years. You'll find the rules for that in IRS Pub 590 available at http://www.irs.ustreas.gov/forms_pubs/pubs.html.

You could also "borrow" from the IRA by taking money for no longer than 60 days. If you redeposit the amount within 60 days, you will not be taxed or penalized. Keep it out longer, and you will be.

Regards..Pixy
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You cannot do that from an IRA, only from something like a 401k plan that allows loans

Oops,

Sorry for the mis-information. Thanks for the correction, Pixy.

I think everything I wrote is true for a 401(K), but as TMFPixy mentioned, none of what I wrote applied to an IRA. (Sorry about that).

That's why I'm not an Accountant, I guess. :)

Good luck, all
the hendrys

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There are some IRA custodians that let you use money inside your IRA to invest in real estate, but you have none of the usual ownership/control rights. And I'm quite sure that you're not allowed to invest in your primary residence.
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Thanks to both TMFPixy and thehendry's for responding. Are the rules the same for SEP-IRAs and 401k Rollovers as they are for regular IRAs?

Thanks
wjh2010
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Wjh2010 asks:

Are the rules the same for SEP-IRAs and 401k Rollovers as they are for regular IRAs?

Yes. They're both traditional IRAs. One is established to receive contributions from an employer under a SEP, while the other is established to receive money from a former employer's retirement plan. As a traditional IRA, they cannot be used for a loan.

Regards..Pixy
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I am not sure, but I have heard there are differences with the roth IRA that the money can be withdrawn from it after five years but that may only be for the standard hardship rules
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The institution that houses my IRA has assured me that I can not borrow money from my IRA for any purpose, not even to buy a house. That's one reason why 401 k's are so attractive because you could borrow money for a downpayment and then repay it with interest. The only option with an IRA is a premature withdrawal, requiring a penalty and the payment of taxes. However, homeownership might allow one to avoid the penalty. Check with your accountant.

It would be nice to understand why these two different options for tax-deferred savings are subject to varying rules. In my case, I don't have access to a 401-K but would love it if I did.

Marcia 25

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After you've had any Roth IRA open for a year, you can withdraw from any of your Roth IRAs up to the amount of your total contribution so far to that Roth IRA (but you can't put it back). Withdrawal of earnings (i.e. anything more than you contributed) usually involves taxes and penalties, though there are exceptions.
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A related question on Roth IRA's. Are earnings from a Roth account ever taxed if they are withdrawn in non-penalty situations?

Specifically, If I invest $100's in WUNDERCOMPANY and that turns into $1,000,000 by the time I retire and draw from the account, am I taxed on the gains at any point?

What If I sold WUNDERCOMPANY's shares before I retire, but leave the gains in the account or use them to invest in another company?

Thanks,
chasemarmot
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TMF Pixy writes that you may use your IRA for a first-time home purchase, but you may not have owned a home within the past two years. I don't doubt the accuracy of this info, but curious about the bureaucratic scenario that considers someone who has owned a home more than two years ago as a first-time purchaser. Hope someone can shed some light on this for me.


Hate being kept in the dark...

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chasemarmot,

The IRS publications about the Roth IRA clearly define what a "qualified distribution" is. If you make a qualified distribution (withdrawal), there is no tax assessed by the feds. (Assuming tax laws remain the same)

Any transactions that occur inside the IRA are non-taxable events. The only thing that can generate a taxable event is moving money outside the IRA (or violating one of the prohibitions)
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A friend of mine took 10K from his,either IRA or 401K, for a downpayment on his first home. It was not a loan. He doesn't have to pay it back. However, he did have to pay taxes, but no penalities were applied. Check with your employer as to what rules apply to your particular plan.
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Maybe someone else down the line responded to this but i just couldnt wait to read thru all the responses so here goes. It is true that you cannot use money from a "traditional ira" to pay for a house but you can use money from a "roth Ira" towards the purchase of a first time home. This was one of the benefits of having a Roth ira. You can either use for purchasing a home or to education costs. But before you can use that money towards the house I believe there is a waiting period of 5 years.
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