Advanced Personal Finance

IRAs have a key place in a good retirement plan. They can give you a tax break and grow tax-deferred (in the case of a traditional IRA) or are funded by after-tax money and are tax-free at retirement (Roth IRA). Along with the 401(k), they will likely constitute the bulk of most people’s retirement savings. They’re great vehicles for saving.

But IRAs can also be great tools for spending. If you’re buying a first home or paying for college, you can take a distribution from an IRA without the usual 10% IRS penalty. (There are also other ways to take an early distribution, but they’re much less common)

Using It For First-time Home Buying

You can use up to $10,000 in an IRA for the purchase of a first home. If you’re married, you can each take $10,000 out of your individual accounts. The home doesn’t even have to be for you - children, grandkids, and parents all apply. And the definition of ‘first-time home’ is pretty loose in my book. You can’t have owned a principal residence at any time in the previous two years. This can be particularly helpful for people in the military, for example, who have rented for a while.

Using It For School

There are obviously several rules for using IRA money for school. First, the student has to be you, your spouse or kids, or grandkids. The school has to be IRS accredited. You have to use the money for tuition and school fees.

Roths Are Different

Since Roth IRAs are taxed differently than traditional IRAs, the rules for a qualified distribution are a little different. Basically, you have to have had the Roth for five years for the distribution to be completely tax-free.  Additionally, you can always withdraw your original contribution from a Roth.

You should really try to avoid tapping your IRA for anything but retirement, but it’s nice to know you can for some big life events most people face. These rules make doing so a little less painful.

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This entry was posted on Tuesday, July 3rd, 2007 at 8:18 am and is filed under IRA, Tax planning. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.