Every working American has to have 401-K, granted if the employer provides one and contribute at least the percentage matching employer’s contribution. The same time it’s prudent to have traditional IRA. When I changed jobs early in my banking career I always rolled my former employer’s 401-K into an IRA.
Several years ago our family was in the process of moving to Charlotte NC from Orlando FL. At the time the bank I worked for was relocating me. We didn’t want to rent so our intent was to buy a house first and then sell our Florida home. Our income was enough to qualify for a new mortgage while our starter home in Orlando was still on the market for sale. We knew the area we wanted to settle and our price range was a single family home for under $500,000. I just wasn’t sure if to go with 15 or 20 year mortgage. To be on the safe side, we decided on 20 year. The same time I was determined to put at least 20% down. I think it’s a waste of money to pay PMI that benefits only the lender. As we were saving for the down payment and as relocation time came closer it became obvious that we’ll be $8,000 to $10,000 short from our 20% down payment goal. We found our perfect house that was listed for sale for $475,000 and since it was sellers market we acted fast and made an offer. As closing day was approaching, I knew we’ll be short $8,000 for our down payment.
Borrowing From Traditional IRA
For sometime I contemplated about making $8,000 withdrawal from my traditional IRA, paying 10% penalty and incurring taxes at the end of the year. There is an exception where first time home buyer can withdraw up to $10,000 from the traditional IRA penalty free. Unfortunately for us, we were buying our second home so we couldn’t use this exception. But then I remembered IRA 60 day rollover rule.
If you take a distribution from your traditional IRA, you can roll over the amount to the same traditional IRA or another traditional IRA, as long as the following requirements are met:
- The rollover is completed within 60 days of receiving the distribution.
- You have not completed an IRA-to-IRA rollover for the IRAs within the 12-months that preceded the date the distribution occurred.
- The amount is rollover eligible. For IRA-to-IRA rollovers, ineligible rollover amounts include amounts representing RMD required minimum distributions.
- I you are 70 1/2 or older, then you can’t rollover your RMD.
- If you are required to take RMDs each year, be sure to remove the current year’s RMD amount from your IRA before implementing the rollover.
IRA rollover 60 day rule was exactly what we needed, which was a short term loan. We had equity in our old home and my plan was as soon as we sell it to roll back those $8,000 into my IRA. Our home in Orlando has been already under the contract and targeted closing date was only a few weeks away. We ended up closing on the house in Charlotte while we were still packing our stuff in Sunshine State. Granted we took the risk if for whatever the reason house sale fell through I’d be on the hook to pay 10% early withdrawal penalty and later on pay taxes. When we buy our next house we’ll definitely have 20% down.
