Once you put money in an individual retirement arrangement, it's supposed to grow tax-free until you retire. Generally, money that comes out of your IRA before you turn 59 1/2 is taxable and subject to a 10 percent penalty for early withdrawal. If you need to pay your property tax and have no other option, the Internal Revenue Service offers a few ways that you can tap into your IRA.
Cost Shifting and Hardships
The IRS allows you to take penalty-free early distributions from your IRA under limited circumstances, although they aren't technically called hardship distributions, and those circumstances don't include the need to pay property taxes You can, however, take money out of your IRA if you have high medical expenses, need to pay for health insurance while you are unemployed, need to pay for higher education expenses, or become disabled. You could use the money that you would use to pay for your health insurance to pay for your property taxes, then take an IRA distribution to pay for your health insurance. This would have the same effect as taking a distribution for your property taxes.
Short-Term Rollover Loans
If you just need the money for a little while, you can technically take out an interest-free loan for up to 60 days from your IRA by using the rollover provision. Once a year, you're allowed to pull money out of your IRA and roll it over to a different account. The IRS gives you 60 days to complete the rollover, meaning that you could withdraw the money, pay your property taxes, put the money you used for your property taxes back with the IRA money and redeposit it. If you get the whole process finished on time, you won't pay any tax. Missing the deadline, though, means that you'll have to pay tax and penalty on everything you withdraw. Whatever you do, don't be late!
The Cost of Withdrawals
If you decide to withdraw money from your IRA to pay your property taxes, you could be subject to three different taxes. First, you'll have to pay federal income tax on the money that you pull out. Second, you'll have to pay a 10 percent penalty tax on the early withdrawal. Third, you'll have to pay state income taxes. Even if you make a withdrawal for an allowed reason, you'll still have to pay federal and state income taxes. As an example, if you pull $2,000 out of your IRA and pay taxes in the 25 percent federal and 5 percent state brackets, you'll pay $500 in federal tax, $200 in federal penalties and $100 in state tax, leaving you with $1,200.
Paying Property Tax Penalties
In most parts of the country, you won't lose your house if you pay your property taxes a little bit late. You will, however, have to pay penalties, interest or both. For example, New York City assesses an annual percentage rate of either 9 percent or 18 percent on late property tax payments, and you can make partial payments over time to reduce the balance that's subject to penalties. In Minnesota, penalties vary, but the worst-case penalty is 14 percent if you pay one year late. California has a base penalty of 5 percent plus one half of 1 percent per month interest, capped at 25 percent over 40 months. Most of these penalties are less than the cost of withdrawing from your IRA. Before you decide to save money by paying your property taxes late and paying a penalty, research if you will be putting your ownership of your house at risk. Losing your house to save a few dollars in taxes isn't a very smart financial move.
- The City of New York: Late Payments
- Goodhue County, Minnesota: Auditor/Treasurer Penalty for Late Payment of Property Tax
- State of California Franchise Tax Board: If I Pay My Taxes Late, What Interest and Penalties Will I Be Charged?
- IRS: Retirement Plans FAQs Regarding Hardship Distributions
- IRS: Publication 590 -- Individual Retirement Arrangements
- Bankrate.com: Take out a Short-Term Loan from Your IRA
- Fidelity.com: IRA Withdrawals
- Jupiterimages/Comstock/Getty Images
- How to Report an IRA Rollover on a Tax Return
- What Form Do I Use to Report an Early IRA Withdrawal?
- How to Avoid an IRA Early Withdrawal Penalty
- How Much Do You Pay in Taxes If You Cash Out Your Retirement Early?
- What Is the Total Percentage of Tax & Penalty Paid on Early IRA Withdrawals?
- How Does the 10 Percent 401(k) Tax Penalty Work?