taxes

Dipping into your IRA, a taxing downer

Don TaylorQuestionDear Dr. Don,
I plan to take $115,000 from my individual retirement account to buy a home, which will be my primary residence. I am 67 years old and a first-time homebuyer. Will the $115,000 be tax-free?
-- Anna Abode

AnswerDear Anna,
The first-time homebuyer exemption in an IRA lets someone who qualifies for the exemption to withdraw money from his or her account without penalty. That means he or she avoids the 10 percent penalty tax levied on early distributions from an IRA. And the early distribution penalty ends at age 59½, so you wouldn't owe any penalty.

That doesn't mean you wouldn't owe any taxes. Contributions made to an IRA funded with pretax income are taxable income when the money is distributed. Taking out $115,000 in one calendar year is likely to raise your marginal federal income tax bracket. The Bankrate chart on tax brackets will help you determine if that big withdrawal will raise your tax bracket. Odds are that it will.

If you can qualify for a mortgage loan, it may be a better strategy to finance the home with a mortgage that doesn't have a prepayment penalty and pay down the mortgage over the next few years, managing the impact that the IRA distributions would have on your tax bracket. Work with your tax professional if you can't decide on your own that this strategy makes sense.

I like the idea of owning a home free and clear in retirement. I just think it's better to pay some interest to avoid a big increase in your income taxes.

Get more news, money-saving tips and expert advice by signing up for a free Bankrate newsletter.

Ask the adviser

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." Read more Dr. Don columns for additional personal finance advice.
 

Bankrate's content, including the guidance of its advice-and-expert columns and this website, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this website is governed by Bankrate's Terms of Use.

News alert Create a news alert for "taxes"

advertisement

Show Bankrate's community sharing policy
          Connect with us
MORTGAGE HOME EQUITY AUTO CDs CREDIT CARDS
Product Rate Change Last week
30 year fixed 4.08%  0.16 4.24%
15 year fixed 3.19%  0.04 3.23%
5/1 ARM 3.36%  0.10 3.46%
 
View Rates in your area Next
Product Rate Change Last week
30K FICO-based HELOC 4.36% --0.00 4.36%
50K FICO-based HELOC 4.06% --0.00 4.06%
100K FICO-based HELOC 3.91% --0.00 3.91%
 
View Rates in your area Next
Product Rate Change Last week
60 month used car loan 2.79% --0.00 2.79%
48 month used car loan 2.98% --0.00 2.98%
60 month new car loan 3.23% --0.00 3.23%
 
View Rates in your area Next
Product Rate Change Last week
1 Year CD 0.94% --0.00 0.94%
2 Year CD 1.13% --0.00 1.13%
5 Year CD 1.76%  0.00 1.76%
 
View Rates in your area Next
Product Rate Change Last week
Balance Transfer Cards 15.77%  0.06 15.71%
Cash Back Cards 16.48%  0.07 16.41%
Low Interest Cards 10.96%  0.10 10.86%
 
Next
advertisement
DAILY TAX TIP NEWSLETTER

Get expert advice during tax season on tax preparation and tips for cutting your tax bill.

advertisement

Connect with us