Using IRA for Down Payment? Good idea?

[Andrew Lisi]

We are looking to purchase our 1st investment property. As I'm learning more, I want it to be a 2-4 unit multifamily home that we would "house hack." We don't have enough savings for a down payment in Chicago (city proper) so I'm considering taking the max out of two IRAs for an additional $20,000. I'm aware of some of the tax issues, but not fully. I'm wondering if, given that we don't have enough savings and would like to invest sooner than later, taking the money out of our IRAs is a good idea.

Help is appreciated!

[John Casmon]

Get an FHA loan. You'll only have to put down as little as 3%. There are loan limits on FHA, but for a 3-flat at the max price/limit you would only be required to put as little down as $16,977.

FHA Limits for Cook County: Single: $365,700, Duplex: $468,150, Triplex: $565,900, Fourplex: $703,250

https://entp.hud.gov/idapp/html/hicost1.cfm

[Lane Kawaoka]

Conventional wisdom says that you should not pilgrimage your retirement fund. However most people 1) get money and blow it on silly things as soon as they get it and 2) don't invest in real estate.

I would say go for it. Calculate your returns and evaluate the 2 scenarios. I think you will find that doing what you are going to do will make out better even with the IRA tax shelter perks just make sure you are disciplined with putting your profits back into investing.

[Vanessa Pham]

@Andrew Lisi

Early withdrawal from IRAs will be seen as taxable income, hence will be taxed with your regular income tax rate plus another 10% penalty (see this IRS page). That's why most people will think about it very carefully. If you decide to go with it anyway and take the tax hit, calculate the tax consequences and make sure you will still have enough for the downpayment after paying all the taxes.

[Bhairavi Patel]

There is a way that you can convert your traditional IRA into a Roth IRA. In my understanding, the traditional IRA will be taxed if you pull it out early. However, the Roth IRA, will be taxed for your first years contributions and will not be taxed on any investment uses thereafter. There are resources that you can access. I'll PM you.

[Stephen Chittenden]

Originally posted by @Vanessa Pham:

@Andrew Lisi

Early withdrawal from IRAs will be seen as taxable income, hence will be taxed with your regular income tax rate plus another 10% penalty (see this IRS page). That's why most people will think about it very carefully. If you decide to go with it anyway and take the tax hit, calculate the tax consequences and make sure you will still have enough for the downpayment after paying all the taxes.

I believe he is saying that he will take $10,000 from each of their IRAs, presumably as a qualified first-time homebuyer withdrawal, so it will not be subject to the 10% penalty. Assuming that there are two of them (he said "we") and that each of them has an IRA and that they both qualify as first-time homebuyers, they should be able to avoid the penalty for early distributions.

[Brandon Hall]

@Vanessa Pham True, the 10% penalty is nothing to mess around with, however there are ways around it and it seems @Andrew Lisi is alluding to the "first time homebuyer" loophole.

What does first time homebuyer mean? 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.

Unfortunately, Andrew, if you or your spouse do not meet the definition above, you may be subjecting yourself to the 10% penalty Vanessa mentions.

Straight from Pub. 590-B, pg. 26:

"First home. Even if you are under age 5912, you do not have to pay the 10% additional tax on up to $10,000 of distributions you receive to buy, build, or rebuild a first home. To qualify for treatment as a first-time homebuyer distribution, the distribution must meet all the following requirements:

1. It must be used to pay qualified acquisition costs before the close of the 120th day after the day you received it.

2. It must be used to pay qualified acquisition costs for the main home of a first-time homebuyer who is any of the following:

1. a. Yourself.
   b. Your spouse.
   c. Your or your spouse's child.
   d. Your or your spouse's grandchild.
   e. Your or your spouse's parent or other ancestor.

3. When added to all your prior qualified first-time homebuyer distributions, if any, total qualifying distributions cannot be more than $10,000.

Qualified acquisition costs. Qualified acquisition costs include the following items. Costs of buying, building, or rebuilding a home. Any usual or reasonable settlement, financing, or other closing costs.

Date of acquisition. The date of acquisition is the date that:

1. 1. You enter into a binding contract to buy the main home for which the distribution is being used, or
2. 2. The building or rebuilding of the main home for which the distribution is being used begins."

[Derek Walvoord]

In order to buy our home, we borrowed money without a tax consequence from our IRA. Check with your plan administrator if you can do this. I think it depends on whether they allow it. I had John Hancock at the time.

I was able to pay myself 8% interest (a number I chose myself) to borrow the money from my IRA for a primary residence down payment.

Good luck!

[Derek Walvoord]

Sorry, one more thing. It was also an FHA 203K, which is the FHA's loan program to buy a junky house and they also give you money to fix it up. One nice thing is that the bank keeps the money, so your contractor has to go to them to get paid. There is an FHA 203K consultant that will walk you through the process. This was a really good way for us to build some quick equity in our house.

If you wanted to house hack, you could do a junky 2-4 flat and use this type of loan to fix it up.  The 203K is kind of a pain in the rear, but it is really effective.

[John Casmon]

Get an FHA loan. You'll only have to put down as little as 3%. There are loan limits on FHA, but for a 3-flat at the max price/limit you would only be required to put as little down as $16,977.

FHA Limits for Cook County: Single: $365,700, Duplex: $468,150, Triplex: $565,900, Fourplex: $703,250

https://entp.hud.gov/idapp/html/hicost1.cfm

[Andrew Lisi]

@Brandon Hall

Thanks for the explanation. To the best of my knowledge, we do qualify. We have never owned a home or had any interest in an owned property. We are the very definition of first-time homebuyer, but with so many tax codes out there, I'm sure there's a way for us not to qualify. That's why there are smart people like you to give me confidence. Thanks!

[Mark Nolan]

@Andrew List

If you decide with using the funds towards your first home purchase, it is important to note that you will need to proof to the IRS not the custodian that the funds were in fact used for such purpose so that you can escape the 10% early distribution penalty. To learn more about the rules, see below code section. 

First-Time Homebuyer Expenses. This penalty tax does not apply when a distribution is taken from an IRA to pay for certain first-time homebuyer expenses (subject to specific dollar limitations) (IRC Sec. 72(t)(2)(F)).

[Kevin Parnella]

FHA has very strict rules for investment properties. In reality, it is nearly impossible to get an FHA loan on an investment property.

[Darren Budahn]

Not if he is planning on living in one of the units

[Mike Krieg]

Check with your mortgage broker as well because they want to see monies 'seasoned' for some period of time before a close. Make sure you know the rules of your mortgage broker or lender.

[Vaundel Gassett]

I intend to do the same, withdraw from my retirement fund. If you indeed go with i think you should make sure it cash flows nicely and if you can maybe increase the amount deposited into your IRA to make up some ground.