Q: Is it true that distributions from a regular IRA account can be taken without penalties or paying taxes if they’re used for higher education expenses for yourself, spouse, or children?
I read this in an article by Pat Curry posted on www.Bankrate.com website. I hope it is true but I think it is not.
A: I don’t think so. My understanding is that you can do that on a ROTH IRA, but not a conventional IRA. To read the rules, go to Ed Slott’s www.taxplanet.com. I think it’s an excellent resource.
Q: Could you tell me the real scoop on using IRA funds for a down payment? I’m a first time home buyer. I think the 10% penalty is waived, but I will still owe income tax on this money. What amount of tax will the IRS charge me? I appreciate your help.
A: The IRS charges you your marginal tax rate, which is the top tax rate you pay. So if you’re in the 28% bracket, you pay 28 percent on the cash. But as a first-time buyers, you are eligible to borrow up to $10,000 from your IRA for the purchase of a home, and use the cash for your down payment and closing cost expenses. It would be less expensive to borrow the cash from your IRA than pay 28 percent (or whatever your marginal tax bracket).
Go to the financial institution where your IRA is invested and ask them to give you the withdrawal rules. Or, you can go to the IRS.gov website and look them up yourself.
Q: In your 11/10/01 AZ Republic article you stated you can’t use IRA funds for real estate. This worries my husband and me because we can no longer meet our mortgage payments and was going to use my IRA funds to pay off the mortgage. I know I’d have to pay fed, state, etc. in taxes. I didn’t know you couldn’t use your IRA money market funds to pay off your mortgage. We don’t know where we’ll get the extra money now to get out from under this debt. It is a mfg. home with a 2-car garage, 1600 sq. ft. and quite nice. We do not own the land and have to pay space rent, which is quite high. We’re in our late 60’s and would appreciate your comments on this.
A: The article is about using your IRA to buy investment property. As you are over the age of 59 1/2, you may withdraw IRA funds (paying taxes of course) penalty-free to use the money for whatever you want. In your case, you’re paying down debt, which is perfectly fine. The story concerned people who want to buy investment real estate within their IRA or other tax-deferred retirement accounts.
Q: I want to start by telling you thanks for what you are doing, anyone else seems to want money for the advise I am seeking, before I know my options. I have about $8,000 in an old 401k from a previous job. I really want to buy an acre of property with it, but I cannot afford to take a hit with the penalties. How can I roll it over into an IRA that will allow me to purchase property as my IRA.
A: You can’t. My experts tell me that you can roll the money over into an IRA but cannot use it to buy individual property. You can buy a REIT with it, but I don’t advise that.
January 1, 2005