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Dr. Don Taylor, CFA, Bankrate.com advice columnistYou can't borrow from an IRA

Dear Dr. Don,
I am looking to purchase my first home in the near future. In order to finance a down payment I'm planning on borrowing money from my Roth IRA. I have had the account for two years. Is there a minimum time I must have the account open before I can borrow money? Also, are there any restrictions to the amount I can borrow or when the money would have to be repaid?

-- Mike Minimum

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Dear Mike,
You can't borrow money from your Roth IRA account. There aren't any lending provisions in IRA accounts, whether they're Roth IRA or traditional IRA accounts.

There is a way to borrow the money for 60 days in the process of transferring the money from the existing account to a new account. When you move the money from one IRA account to another, you have 60 days to fund the new account from the proceeds of the old account. Since financing a down payment isn't a 60-day proposition, this provision of the tax code isn't useful in your situation and is not recommended.

Taking a distribution from the account for your down payment, instead of a loan, might make sense. The Roth IRA has a first-time-home-buyer provision, allowing you to avoid the early withdrawal 10-percent penalty tax on the distribution, but the age of the account is also a consideration. If the account is only two years old, and you've only been contributing to a Roth IRA over that two-year time period, the contributions don't meet the age requirement for an early distribution for the first-time-home-buyer provisions. 

An IRS flowchart shows the requirements for a distribution to be a qualified distribution and thereby avoid the 10-percent penalty tax on an early distribution. 

IRS Publication 590, Individual Retirement Arrangements, has more information on the taxation of Roth distributions. Key in the discussion is that Roth contributions are made with after-tax dollars, so it's the penalty tax on nonqualified distributions and potential taxation of the investment earnings in the account that are relevant.

If you want to pursue tapping your Roth IRA for a down payment on a home, you should talk to a professional tax adviser about the taxes due on the distribution out of the account.

To ask a question of Dr. Don, go to the "Ask the Experts" page and select one of these topics: "financing a home," "saving & investing" or "money."

Bankrate.com's corrections policy-- Posted: Jan. 22, 2007
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