Rollover IRA for 1st Home Purchase

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NAM
Posts: 1
Joined: Tue Feb 13, 2018 5:55 pm

Rollover IRA for 1st Home Purchase

Post by NAM » Tue Feb 13, 2018 6:07 pm

Hi There,

I just found this site today and have found it very useful so far. Though, I haven't seen a post that has quite answered my question.

My wife and I are looking to buy our first home and looking into using an IRA to take at least $10k out for the down payment. I know this isn't usually recommended, but we've discussed it a lot and are comfortable with it, especially since our life plan involves keeping every home we own as investment properties.

My wife has 403b and 401k accounts from previous employers that we'd like to roll into an IRA. We haven't done this before and I'm wondering if we should use a financial planner or do it ourselves through Vanguard, Ally, Ameritrade, etc. I'm seeing it will be less expensive to do it ourselves, but wondering about the complications and things we could screw up ourselves.

Has anyone done either strategy? It seems that Vanguard is a favorite around here, is that the best one to use?

Any help would be appreciated. Thanks!

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Duckie
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Joined: Thu Mar 08, 2007 2:55 pm

Re: Rollover IRA for 1st Home Purchase

Post by Duckie » Tue Feb 13, 2018 9:08 pm

NAM, welcome to the forum.
NAM wrote:My wife has 403b and 401k accounts from previous employers that we'd like to roll into an IRA. We haven't done this before and I'm wondering if we should use a financial planner or do it ourselves through Vanguard, Ally, Ameritrade, etc. I'm seeing it will be less expensive to do it ourselves, but wondering about the complications and things we could screw up ourselves.

Has anyone done either strategy? It seems that Vanguard is a favorite around here, is that the best one to use?
You have two issues here:
  1. Do you need a financial planner to roll an employer plan to an IRA? No. Could there be complications doing the rollover? There could. A financial planner isn't going to help in that case. I rolled a 457b plan from my former employer into a Rollover IRA at Vanguard. This was over ten years ago and was done snail-mail so the process will have changed somewhat. It took a while and there was a minor glitch but it got there. I wasn't in a hurry.
    .
  2. What custodian should be used for the Rollover IRA? Here on this forum we usually recommend Vanguard, Fidelity, or Schwab.
Does she already have an IRA or taxable account somewhere?

runner540
Posts: 617
Joined: Sun Feb 26, 2017 5:43 pm

Re: Rollover IRA for 1st Home Purchase

Post by runner540 » Tue Feb 13, 2018 9:40 pm

Welcome! I Have not done either.

Keep in mind that if you roll employer accounts into a traditional IRA, it will make future backdoor Roth contributions more costly/complicated.

Taking money out of Roth is not recommended for good reasons. It would take dire straits to get me to do that. If $10k makes or breaks the house purchase, you might be stretching too far.

Alan S.
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Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Rollover IRA for 1st Home Purchase

Post by Alan S. » Tue Feb 13, 2018 10:31 pm

The penalty waiver for a first home purchase is not available with a 401k distribution, just available for IRA distributions.

So if up to 10,000 is rolled to a TIRA, a distribution can be taken without penalty. The waiver must be claimed on Form 5329, exception code 09. The 10,000 limit is a lifetime limit, but if each spouse has an IRA, each spouse has their own 10,000 exception.

This is much simpler than using a Roth IRA, which has much more complex alternatives and requirements, even though the distribution would be tax free.

Also, note that if the purchase falls through, you have 120 days to roll the distribution back to the IRA, and such rollover does NOT count for purposes of the one rollover per 12 months limitation.

billfromct
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Joined: Tue Dec 03, 2013 9:05 am

Re: Rollover IRA for 1st Home Purchase

Post by billfromct » Tue Feb 13, 2018 10:57 pm

When rolling over a 401k to a traditional (tax deductible) rollover IRA, make sure it's a "trustee to trustee" transfer.

I've done this before from my Fidelity 401k to my Vanguard rollover IRA. Fidelity made the check to "VFTC FBO billfromct" (Vanguard Fiduciary Trust Company, For Benefit Of). Fidelity does not take taxes out & sent the check to me (don't sign the check) & I forwarded the check to Vanguard with a cover letter explaining what fund the check would be deposited into within my rollover IRA.

Just be aware that the $10,000 taken from your tax deductible IRA to purchase your 1st home is not subject to the 10% penalty, as mentioned previously, but it is subject to state & Federal income taxes. I don't know if the IRA mutual fund company would with hold any state or Federal income tax or send you the entire $10,000. You should check with your rollover IRA company.

bill

Alan S.
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Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Rollover IRA for 1st Home Purchase

Post by Alan S. » Wed Feb 14, 2018 1:41 pm

You can always decline withholding from a TIRA distribution, but if don't the default withholding rate is 10%.

Generally, the best approach is to decline withholding from an IRA distribution except where you have a specific plan in place that depends on IRA withholding. And if you do, you will probably want to increase the default rate from 10% to the amount you want withheld for your plan.

You would generally not want to have your 10,000 first home distribution cut to 9,000 due to withholding.

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