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Dear Tax Talk,
I am thinking of withdrawing the full $10,000 from my traditional IRA to pay for closing costs on a first-time home purchase. I am wondering if it's worth it, because I will be taxed on this withdrawal and I am in a much higher tax bracket than I used to be.
Currently, I live in New York City and am in the 28 percent tax bracket for federal and 5 percent for state and local. I don't absolutely "need" the money, because I could borrow from family at an attractive rate (approximately 3 percent), but I would like to avoid this if economical.
-- Matt
Dear Matt,
A first-time homebuyer can withdraw up to $10,000 from his IRA without incurring the usual 10-percent penalty that applies to early withdrawals. The withdrawal is considered income, and regular income tax is due.
Gross income for federal tax purposes is usually considered the same for state tax purposes, so the withdrawal can cost you up to $3,300 in combined taxes.
However, you can offset some of the income tax impact from the withdrawal by deducting the interest and taxes on your new home. For example, if you expect to pay mortgage interest and taxes of $10,000 before the end of the tax year, the withdrawal will be a wash for tax purposes. Don’t change your withholding allowances on your Form W-4 at work.
Alternatively, if you use borrowed money, an increased refund from the mortgage interest and tax deduction can help you repay that loan. However, as you point out, a family loan has other implications.
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