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A dream house and your IRA
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December 7, 2000: 6:04 a.m. ET
Purchasing your first home with IRA money? Know the rules to avoid fees
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NEW YORK (CNNfn) - You found your dream house with a fire place, a formal dining room and a flagstone patio. You're ready to dip into your savings, and you've heard about an IRA provision for first-time home buyers. But what are the rules?
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 Lyndall Medearis, a fee-only planner, answers questions on Your Money's viewer mail segment. |
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You may also have postponed saving for retirement until your early 40s. What's the best catchup strategy for moderate to aggressive saving?
Lyndall Medearis, a fee-only planner, offered some tips for first-time home buyers and people who haven't started saving for retirement yet.
Lyndall Medearis recently appeared on CNNfn's Your Money, and answered questions via e-mail for CNNfn.com.
Every week, CNNfn.com brings you video from Your Money, where experts answer your questions about financial planning issues. If you have a question, you can e-mail the show at yourmoney@cnnfn.com.
Frank from South Caroline writes: I'm a first-time home buyer with a traditional IRA. I've heard that if I take an early withdrawal and it is used as a down payment on this home, that the large 10 percent fee will not apply. If this is true, are there any tax forms I need to fill out or will this be claimed on the 2000 tax return? I'll be taking about a third of the balance out of my IRA account for this up coming transaction.
Answer: Most people think the first-time home buyer provision applies only to a Roth IRA. But the change to the tax code in the Tax Relief Act of 1997 applied to both Roth and traditional IRAs.
The definition of a first-time home buyer is someone who has not owned a home for the last two years. There is a limit of $10,000 that you can withdraw. It is only free of the 10 percent IRS penalty – you will still be fully responsible for the income tax on the entire amount you withdraw.
The $10,000 is a lifetime limit that can be used to buy a home for a spouse, a child, a grandchild, or any parent or grandparent of you or your spouse.
There are other factors to keep in mind.
If there is a delay or cancellation of the purchase or construction, the distribution can be put back into the IRA within 120 days (twice the normal limit) of receipt without penalty. I'm a little unsure about the number of the IRS form, so a note attached to the return indicating proof of usage for the purchase of a home will satisfy the IRS.
Second, there is a form that needs to be filed with your 2000 Income Tax return. Check with your tax preparer to make sure.
Third, any amount that is withdrawn over $10,000 will be subject to both the tax and the IRS penalty. Some people think that the amount is $10,000 per IRA. That is not the case. It is the total amount available.
Jump-start your retirement savings
Gloria from San Francisco writes: I'm 44 years old and just started a job that pays me $60,000 a year plus options. The options I'm not interested in since I took a big hit at tax time last year and ended up making installment payments, since I didn't have the money to pay my taxes.
At this point in my life I am almost debt free (I have approximately $900 in outstanding debt), my rent if $685 per month (rent control in San Francisco) and my utilities never total more then $85.00 per month.
Unfortunately, I have no tax deductions since I have no children, and am single and I also don't have any retirement plan. This is the first time in my life that I can really start thinking of retirement since previously I had lived from check to check.
What I want to do now, is make up a game plan where I can start putting money away for retirement and have money left over to be able to do things I like. I don't want to tie up big chunks of money now but I don't want to spend my retirement years on subsistence living. I'm not a believer in the stock market but I know I have to make some investment somewhere down the line and I'm not sure where I should start.
Answer: It sounds like your previous options experience was not so pleasant. When utilized correctly, options create millionaires on a pretty regular basis. You just need proper planning advice when its time to exercise them.
With regards to retirement plans and the stock market, I can tell that you are not comfortable with market exposure, but unfortunately for you that really is the only way that you can realistically reach your goal in time for a traditional retirement of age 65. Start slow.
I would advise you to sit down and list all of your financial goals and objectives.
Do you need help with long-term financial planning? E-mail experts at CNNfn.com at retirement@cnnfn.com.
A financial planner -- preferably one that has come from a good referral source, like a friend -- will help you organize and manage your cash flow so that you can easily put more long term capital to work for your retirement years. Most importantly, a financial planner will be able to give you the education and guidance that you will need in order to get more benefit from having stock options. 
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