There are plenty of reasons to refinance your home, such as switching from an adjustable rate mortgage to a fixed rate mortgage, or to secure a lower interest rate or shorter term. If you don't have enough equity in your home to cover the refinance fees you might consider tapping your Roth IRA account.
Count the cost before you refinance your home to make sure it makes good financial sense. The savings that accrue from the refinance must offset the taxes and closing costs associated with any refi. This is particularly important if you expect to move within the next couple of years.
Determine how much money you will need out-of-pocket at closing. Draw on easily accessible, penalty-free sources first, such as your savings and investments accounts. If you don't have enough set aside in these accounts you can tap your Roth individual retirement account. Since you funded your Roth IRA with after-tax dollars, you can withdraw an amount equal to your total contributions without incurring either a tax obligation or a tax penalty. You don't even have to report these withdrawals to the IRS.
Tap the earnings in your Roth IRA as a last resort. The funds in your Roth IRA, including the earnings on your contributions, always belong to you and you can withdraw them at any time, for any reason, including to refinance your home. If you have had money in a Roth account for at least five years and you are at least 59 1/2 years old, you can take the earnings out without any tax consequences. If you don't meet those qualifications, you will owe ordinary income taxes on any earnings withdrawals, plus a 10 percent tax penalty on them.
- Internal Revenue Service: Publication 590, Individual Retirement Arrangements
- Internal Revenue Service: Publication 590, Are Distributions Taxable?
- Kiplinger: How to Tap an IRA for a Home Purchase
- USAA: IRA Contributions and Withdrawals
- Internal Revenue Service: Retirement Plans FAQs regarding Hardship Distributions
- A first time homebuyer can withdraw non-qualified earnings of up to $10,000 from his Roth IRA without the tax penalty, but the earnings are still subject to federal income taxes.
- Money in a Roth account that you converted from a traditional IRA will have to remain in the account for at least five years or until you turn 59 1/2, whichever comes first, before you can withdraw it penalty free.
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.