Withdraw from your IRA for a Bigger Down Payment

We’re purchasing a home this year, and we’re shooting for a 20% down payment. We’re pretty close already, but we want to make sure we have plenty for the down payment, the closing fees, immediate furniture purchases, and still have plenty in our emergency fund.

One thing we’ve decided we could do is withdraw from our retirement IRA. Before you shoot me for dipping into our retirement, let me give you the background on this fund. I started a traditional IRA about 7 years ago before I began contributing to a 401K to avoid paying taxes on some extra savings I had built up. Because I now contribute to a 401K, and consider it our primary retirement savings vehicle, the IRA is just sitting there.

Anyway, about 25% of this IRA are funds in which I have “basis.” In other words, I paid the taxes on the contribution already. I did this because there was a year in which I contributed to my 401K and the IRA in the same year. It was a year in which the rules hadn’t changed yet, so I had to fork over the taxes for the IRA contrib. Confusing, I know…but just know I’ve paid the taxes on this 25%. So, for this 25%, I can withdraw without having to pay any taxes. Also, since I’d be withdrawing for a first home purchase, I would avoid the IRS penalty for early withdrawel. Check out the full extent of the rules here.

I really think this a good move for us….no taxes, no penalty, more liquid funds at closing, and I’ll never again have to remember I have that basis in the IRA funds.

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About Philip Taylor

Philip Taylor, aka "PT", is a CPA, financial writer, FinCon CEO, and husband and father of three. He created PT Money back in 2007 to share his thoughts on money and to meet others passionate about managing their finances. All the content on this blog is original, and created or edited by PT. Read more about Philip Taylor, and be sure to connect with him on Twitter, Facebook, or view the Philip Taylor+ Google profile.