Roth IRA Vs 401K For First Home
I've searched through the forums about IRA's and 401K's and I have heard a lot about self-directed IRA's but I don't think I need to worry about that with a Roth.
I am wondering what is the better choice, to take a loan from my Roth as a first time buyer or from my 401K?
A self-directed IRA or Roth allows you to invest in real estate, as you would invest in stocks, bonds or mutual funds. If you make 300% investing in real estate, then your IRA or Roth increased in value dramatically.
If you are only taking a loan from your 401k, then you pay back the loan at maybe 6%. Sure you get to keep the 206% profit, but as a taxable event. The 206% does not get to roll back into your 401k.
The beauty of the self directed is that you are growing your account by 300%, not by 300% - taxes.
Brenda
I have heard a lot about self-directed IRA's but I don't think I need to worry about that with a Roth.
Why do you not need to worry about a Roth? What are you thinking about a self-direct IRA?
Are you sure you can 'borrow' from an IRA for a home purchase?
John
[addsig]
My math was screwy and .. I meant to say that you are growing your IRA by 300%, not your personal bank account by 300% - 6% - taxes. (math is proabaly still a little screwy, but you get the idea)
Brenda
I am not a CPA or lawyer. My understanding is you can't invest in REI with 401K. You need to convert your 401K to IRA or ROTH IRA and you need to use self-directed company if you want to put your properties under retirement account. Your gains will be tax deferred if IRA and tax free if ROTH IRA.
You can borrow from your 401K to purchase property; however your gains from REI won't be tax deferred or tax free.
The disadvantages of buying properties under IRA / ROTH IRA:
1) You won't be able claim the losses against your income.
2) Since you can only contribute certain amount per yr, you need to make sure you have enough cash reserve under your IRA / Roth IRA account.
3) I am not sure if your interest expense is tax deductable or not.
Whether you should borrow from 401K, use IRA/Roth IRA really depends on your situation.
Do you want to reduce taxes now? Then borrowing from 401K and purchase the properties outside IRA/Roth IRA might be better.
Do you think you will be on the higher tax bracket when you pay off the house? Do you think you will earn a huge profits?Then Roth IRA might be a good option since you never have to pay tax again.
Do you think your tax bracket will be lower in the future? Then IRA might be a better choice b/c of the deferred tax feature.
Contribution to Roth IRA is taxable. Therefore, when you convert 401K to Roth IRA treated as an taxable income. If you convert a large amount, that may push you to higher tax bracket. You can convert it gradually every year if that the case.
You CAN'T use Roth IRA if you use the property for personal needs or if the property was owned by your immediate family. There are some restriction with Roth IRA. Check www trustetc com.
Hope that helps.[ Edited by ew86 on Date 06/23/2004 ]
Thanks everyone, looks like I need to do some more research on this. I don't want to do either if I can help it, but it is my last resort to help pay for the property.[ Edited by frantzyy on Date 06/23/2004 ]
Is this for an investment house or a personal residence house?
Brenda
It will be my personal residence and will eventually be used just as an investment property, but not for a at least two years of me living there.
I forget the exact wording, but basically your self directed IRA or Roth is a seperate entity from you personally. You can not use a self directed to buy your personal residence.
Brenda