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Author: PleaseAndThanks One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121187  
Subject: Early IRA withdrawal without penalty Date: 1/29/2006 3:55 AM
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Is it true that I may withdraw up to $10,000 from my SEP or Roth IRAs to purchase a house or condominium to be my primary residence? Quoting from Publication 590:

http://www.irs.gov/publications/p590/ch01.html#d0e7872

<blockquote>First-time homebuyer. Generally, you are a first-time homebuyer if you had no present interest in a main home during the 2-year period ending on the date of acquisition of the home which the distribution is being used to buy, build, or rebuild. If you are married, your spouse must also meet this no-ownership requirement.</blockquote>

I am single and am selling my second home this month to purchase a primary residence this spring. I have never in my life owned my primary residence (only rented). So the word "main" above seems to say I can withdraw from my SEP or Roth without penalty. But the word "Generally" gives me pause enough to ask you. (I realize this withdrawal will reduce funds available to my future retirement and that that may or may not be advisable.)
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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 83146 of 121187
Subject: Re: Early IRA withdrawal without penalty Date: 1/29/2006 4:19 AM
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I am single and am selling my second home this month to purchase a primary residence this spring. I have never in my life owned my primary residence (only rented). So the word "main" above seems to say I can withdraw from my SEP or Roth without penalty.

I'll be dipped, as we used to say in Kansas. I've never looked at this provision carefully, and my initial reaction was that you wouldn't qualify because of the second home. So I looked it up in IRC 72. You're right. You do qualify. Thanks for my thing learned for today. I can take the rest of the day off.

But the word "Generally" gives me pause enough to ask you.

Odd, isn't it? In the law "generally" is quite expansive, yet it sounds wishy-washy to the ear. It is not a synonym for "usually."

Phil

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Author: DeltaOne81 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 83149 of 121187
Subject: Re: Early IRA withdrawal without penalty Date: 1/29/2006 11:47 AM
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You might want to call the IRS. They have a pretty nice help line. I know what they say isn't official, but at least you can get the confirmation.


However, are you sure you want to do this? It may sound nice, but, you can never (after 60 days at least), put that $10K back in the Roth. The tax free gains that that money would have earned you for the rest of your life is gone. The government likes to encourage home buying, because it makes for property taxes... but that doesn't mean its a good idea.

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Author: DeltaOne81 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 83150 of 121187
Subject: Re: Early IRA withdrawal without penalty Date: 1/29/2006 11:48 AM
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The government likes to encourage home buying, because it makes for property taxes... but that doesn't mean its a good idea.

Just a clarification... "but that doesn't mean pulling from a Roth is a good idea just because the government lets you." I didn't mean to say home buying is a bad idea. Unless you're in some of the most expensive markets, it usually is.

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Author: bmillz Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 83158 of 121187
Subject: Re: Early IRA withdrawal without penalty Date: 1/29/2006 1:51 PM
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If you do decide that you want to use Roth IRA funds for buying a house keep in mind that the 10k only applies to earnings.

You can always withdraw contributions to a Roth IRA without tax implications.

That means that the amount that you are able to withdraw from your Roth may be more then 10k.


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Author: WPatch Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 83165 of 121187
Subject: Re: Early IRA withdrawal without penalty Date: 1/29/2006 6:05 PM
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If you do decide that you want to use Roth IRA funds for buying a house keep in mind that the 10k only applies to earnings.

Earnings and rollover contributions which have aged less than 5 tax years.

Bill Patch

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Author: pussinboots1 Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 83177 of 121187
Subject: Re: Early IRA withdrawal without penalty Date: 1/30/2006 8:57 AM
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The tax free gains that that money would have earned you for the rest of your life is gone.

Not really. The money will just be a new retirement vehicle called "home equity." Granted, long-term returns on stock are better than real estate, but leverage is much, much cheaper for U.S. primary resident purchase than it is for stocks. If the buyer isn't stretching his/her limits and that SEP/IRA money goes toward a 20% down payment on a home that he/she plans to inhabit for many years, then the money will usually be put to good use (i.e. it wouldn't have done any better in a stock-based retirement account).

Puss

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 83181 of 121187
Subject: Re: Early IRA withdrawal without penalty Date: 1/30/2006 11:10 AM
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The tax free gains that that money would have earned you for the rest of your life is gone.

Not really. The money will just be a new retirement vehicle called "home equity." Granted, long-term returns on stock are better than real estate, but leverage is much, much cheaper for U.S. primary resident purchase than it is for stocks. If the buyer isn't stretching his/her limits and that SEP/IRA money goes toward a 20% down payment on a home that he/she plans to inhabit for many years, then the money will usually be put to good use (i.e. it wouldn't have done any better in a stock-based retirement account).


I'm not sure I agree. Most people forget to include the very significant annual carrying charge when they talk about real estate returns -- namely, real estate taxes. If you were to buy a smaller home (or not buy at all) and keep the money in a retirement fund, you might end up quite a bit ahead. Add in the net after-tax, out-of-pocket cost for the mortgage and I'm confident the retirement fund is the better choice.

Ira


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Author: jrr7 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 83182 of 121187
Subject: Re: Early IRA withdrawal without penalty Date: 1/30/2006 11:15 AM
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Most people forget to include the very significant annual carrying charge when they talk about real estate returns -- namely, real estate taxes.

And most forget to include exterior (mowing lawns, shoveling snow), interior (cleaning carpets, painting walls), and structural (new roof) maintenance.

But then again if you didn't own you'd have to rent, so you can look at the real estate as providing tax-free income in the amount it would cost to rent.

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Author: pussinboots1 Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 83189 of 121187
Subject: Re: Early IRA withdrawal without penalty Date: 1/30/2006 4:06 PM
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Most people forget to include the very significant annual carrying charge when they talk about real estate returns -- namely, real estate taxes.

Each case is different, but I think even accounting for all expenses you would not incur renting, it's still very possible that'd you'd do as well or better with the money as (up to 20%) principal rather than in (say) VTSMX in a SEP/IRA. Note that with an 80/20 mortgage and an assumed 5%/year return on real estate, you're making a raw 25%/year return on the invested money (down payment). If RE taxes are 1% of the home value, you're still making 20%/year (before other expenses/benefits). Don't forget to account for the fact that rent generally increases over time.

Besides the cheap margin, U.S. homeowners also get the interest deduction and the ability to refinance w/o penalty (in many cases).

In our case, the interest deduction covers RE taxes; refinancings have made it so that our interest+taxes+insurance+maintenance+water/sewer costs are no more than what rent would be on a comparable place. And, we've only owned for 4.5 years...

Puss

P.S. Once we got to 20% equity, all of our refinancings have been 0/0 30FRMs.

P.P.S. The rate of return clearly drops over time (as equity increases), unless your mortgage is interest-only, or you're doing cash-out refinancings.

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Author: gurdison Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 83197 of 121187
Subject: Re: Early IRA withdrawal without penalty Date: 1/30/2006 6:10 PM
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<I'm not sure I agree. Most people forget to include the very significant annual carrying charge when they talk about real estate returns -- namely, real estate taxes. If you were to buy a smaller home (or not buy at all) and keep the money in a retirement fund, you might end up quite a bit ahead. Add in the net after-tax, out-of-pocket cost for the mortgage and I'm confident the retirement fund is the better choice.>


Many may correctly argue that their home values have increased significantly over the years. In some of the hotter markets those increases tower over the annual costs or being in the house. However, I am still with Ira on this one.

Maybe my thought process is skewed because I do not think a home should really be classified as an investment. With a stock or a mutual fund I know my cost basis as well as my history of dividend payments. It does not need infusions of cash to maintain itself. I also know the exact price of my investment at any point in time. As such, calculating my total return or annualized return is a relatively easy thing to do.

With a home if you are serious about tracking your total return you need to know what all of your costs and expenses are. Such things as upgrades, repairs, maintenance, insurance costs, taxes, mortgage interest and some utilities are good for starters. They are offset by any tax benefits you receive from your annual 1040 filings. The biggest piece of the puzzle that is often missing is a reasonable estimate of what your home is actually worth at any point in time. You do not know what you will get until you actually have a buyer at hand. Even then you may well have a number of transaction costs (comissions, taxes, repair allowances, fees) that should be figured into the mix. Here in NJ we were hit with a 3k plus realty transfer fee last year (it was only a few hundred a few years back). Our 140% "profit" based on gross sales price minus gross buying price turned into about 4.5% per year when I figured out the math as honestly as I could. It beat inflation but not by much.

Even if you have managed to make a really good profit on your sale, most of us have to buy something else. In most cases that something else is another home that is also grossly overpriced. I will admit that those who deliberately plan on selling their overpriced home and moving to a lower cost area will be able to realize a tangible gain on their transaction. That is not the case for most people aged say 25 to 55.

Finally, owning a home is usually an emotional experience. That alone takes it out of the "investment" world to me. Many spending choices are made based on emotions rather than detailed cost/benefit analysis. The bottom line is that a true investment should be something that is measurable at any time. I suspect that most people who own rental properties understand that concept very well. The ones who are successful at it are very good at knowing and measuring whether they are cash flow positive or not. Most of the rest of us (myself included) are not nearly as good at determining an accurate rate of return on our homes.


B

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