Withdrawing funds from retirement for closing costs ?

catlettuceJuly 14, 2010

Good morning All,

I am closing on my home in 2.5 wks and closing costs were almost doubled unexpectedly. In order to cover I am taking a early hardship withdrawal from my retirement account.

On the forms is a question regarding withholding and it states if I do not designate how much to withhold it will automatically withhold 10% for Taxes or I have the option of withholding nothing. My question is, better now or will my deductions as a homeowner offset this 10% come tax time?

We are not talking a large amount here but since I am all on my own in this purchase I want tread carefully.

Thanks for any advice.

~Cat

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Billl

If you don't have the money for a down payment and closing costs, you really aren't in a good position to be buying a home.

Also, why did closing costs "double"? Under the new rules, there are very limited circumstances where a lender can significantly increase fees from their good faith estimate.

If you are just going to go ahead with the purchase anyway, you should withhold whatever you expect your tax burden to be. If you don't know, you should consult a tax professional.

    Bookmark   July 14, 2010 at 10:35AM
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catlettuce

Thank you.
I am purchasing FHA/3.5 % down. The closing costs were not what I was told to expect at time of mortgage initiation. So I had dumped into my retirement rather than setting aside cash.
The appraisal and other document fees were all over what I was verbally told to expect. I didn't want to increase mortgage to get money to cover additional costs. It is only a few thousand however I budgeted to tightly & didn't allow for much wiggle room.

Yes, I am on a limited budget for certain but will be actually paying less monthly by about $300, while becoming a homeowner. I am going to have my attorney look over these documents to be safe. Thank you for the sound advice!

~Cat

    Bookmark   July 14, 2010 at 11:19AM
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calliope

In this uncertain climate where taxes coming down the road could change radically.........you'd got good advice, I'm thinking. It's so painless to cover taxable withdrawals as they occur compared to letting it ride. You really can't be certain what your financial situation will be come next April, and a tax obligation then might again put you in a compromising situation.

    Bookmark   July 14, 2010 at 12:05PM
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Beemer

These opinions are regardin Tradition IRAs -- you did not indicate what type of retirement account you wish to use.

1. You will be paying a 10% early withdrawal fee PLUS paying income taxes on the amount withdrawn. The extra dollars withdrawn may even bump up your income tax bracket.

2. You have the option of taking out the withholding now or covering it at tax time. However, if you do not have enough withheld, you can be penalized at tax time.

3. The only way to take money out of retirement without incurring these tax hits is to return the money to the account with-in 60 days. You do not have to put back the full amount -- if you don't you are only taxed on the amount not put back in.

    Bookmark   July 14, 2010 at 1:38PM
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sparksals

Dave would have a heyday with this one! Where are you, Dave???

    Bookmark   July 14, 2010 at 3:52PM
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brickeyee

"I am closing on my home in 2.5 wks and closing costs were almost doubled unexpectedly."

Verbal means nothing in RE.

What is on the 'Good Faith Estimate'?

The loan originator is required to give it to you very shortly after applying for the loan.

    Bookmark   July 14, 2010 at 6:50PM
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annkathryn

Why not just take a loan from your retirement account (assuming the terms of your account allow for it) rather than a withdrawal? If you're saving $300/month by purchasing this house, use those savings to pay back your loan. That way you don't pay the 10% penalty + taxes on the gains.

    Bookmark   July 15, 2010 at 3:17PM
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brickeyee

At least some IRAs are eligible for no-penalty withdrawals for buying you house.

It may be only for a ;first home purchase' and there are other conditions.

The plan documents also must allow the withdrawal, not all do just like loans.

Some plans allow loans, some do not.

    Bookmark   July 16, 2010 at 9:27AM
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