Thinking of Raiding Your IRA for a Downpayment?

Peter Coy

Just a wild guess, but I don't think Carrie Schwab Pomerantz needed to take money out of her IRA in order to cough up a downpayment for her first house.

Director Schwab Pomerantz
She's the daughter of Charles Schwab, founder of the San Francisco-based brokerage firm. But as the company's chief strategist for consumer education, she's in charge of giving advice to people who really do have to scrape nickels together to buy a first house.

Her advice: Think twice before you raid the IRA--even though the IRS does allow a penalty-free withdrawal of $10,000 for buying a first house (that's $20,000 total if both husband and wife have IRAs).

Some bullet points:

*"If you have any alternatives (borrowing from your parents, for example), you'll be better off keeping the retirement accounts intact so you can take full advantage of long- term tax-deferred growth (for IRAs) and tax-free growth (for Roth IRAs)."
*If you must tap an IRA, "use the Roth IRA first. Since Roth IRA contributions were made with after-tax dollars, you won't face any kind of taxation or penalty for withdrawing up to $10,000 (each), in most cases, as long as you've had the Roth IRA account for at least 5 years."
*Be sure to read the fine print about early IRA distribution requirements on the Internal Revenue Service Web site, and always check with your tax advisor before taking any action. Remember that you need to act quickly when you receive the funds: You'll lose your penalty-free status if you don't use the funds within 120 days of withdrawal."
*If you clean out your IRA cupboard, "Be aware that you'll need to start saving even more for your golden years as soon as you possibly can--possibly as much as 20 percent of your income if you have to start saving from scratch now, and as much as 40 percent if you wait another 10 years to start saving."