IRA funds transfer sanity check
L1: IRA funds transfer sanity checkMy wife and I both have IRA’s for which SEPP’s have been set up. We’re 54, and have been pulling from them for about 3 years.
We’re about to undertake construction of a new home, and are faced with financing decisions. We have enough cash on hand to complete 75-80% of construction before additional funds are needed.
A construction loan is an option, but it presents several drawbacks. The rates and fees are excessive compared to getting a first mortgage. More importantly, I can get far better deals paying cash and hiring my own subs instead of using a general contractor and having bank draws pay for everything. So, my tentative plan:
– Build until current funds are used up
– Pull adequate funds from IRA/SEPP #1 (mine) to finish the project
– 60 days later, borrow from IRA/SEPP #2 (wife’s) to repay the “transfer” from the first IRA withdrawal
– Within the next 60 days, pull a first mortgage with cash back to replenish the second IRA withdrawal
There are of course, risks to the above. Finishing construction once the IRA withdrawal clock starts ticking is one of them, but this isn’t my first rodeo in that regard. I’ve a great contractor and subs lined up who I have utilized before. My bigger concern is the lending institution.While I’m certain of our ability to get a first mortgage with adequate cash back (credit and LTV will not be a problem), I’ll be at the mercy of the lending institution’s ability to complete escrow in a timely manner.Still, while not breaking the second SEPP is preferable – I’ve crunched the numbers, and the 10% + interest penalties we’d pay for breaking the SEPP and withdrawing early are less than the added expenses of going the construction loan route.
Setting aside the known risks mentioned above – have I overlooked anything as it relates to the temporary “borrowing” from the IRA’s?2015-09-18 16:14, By: syspig, IP: [18.104.22.168]
L2: IRA funds transfer sanity checkThe IRA aspect seems fine.
BUT, 2 recent experiences with banks/mortgage companies would give me reason to pause:
Our daughter was buying a new home, and selling her old one in early April. I got her the pre-approval within 2 hours, and the mortgage commitment soon thereafter because she bought the house after a short negotiation exchange, with a June 29 settlement. Originally she was getting a bridge/swing loan with both houses as security. As time passed, and she got NO OFFERS on her house (because the realtor over-priced it by not considering the lack of upgrades), she lowered her asking price every 2 weeks, and then weekly, by a total of $50,000. Ultimately the bank lowered the mortgage that they believed that she could afford, and did not give her final approval on the mortgage amount until 3:30 pm on the afternoon before her 10:30 am settlement the next morning, which could not be changed because that seller had a 12 Noon settlement on buying her condo.
My daughter did not get an offer on her house until 4 pm in the afternoon after she bought her new house. Her 401-K loan got delayed by her employer until the morning after her settlement. Fortunately I had anticipated Murphy’s law, and had arranged for our investment accounts to be margin accounts at our broker, and she did likewise. so we were able to move money around for settlement.
The buyer of her house then wanted a 30 day settlement. He got jerked around by his appraiser, and did not get his mortgage approved until 2:30 pm for his 1 pm settlement that same day. He had driven from VA to PA that day with the moving van, and his wife and 6 month old had to wait in the car in 100 degree weather for the approval, sweating in more ways than one. ( He worked for a Fortune 100 company.) I finally told the broker to have them unload their furniture at my daughter’s house, and move in, and she would RENT them the house until the mortgage company got its head out of where the sun doesn’t shine.
MY POINT — DON’T TRUST THAT THE BANK/MORTGAGE COMPANY WILL GET THE PROCESSING DONE WITHIN 60 DAYS !!! THEY HAVE NOT STAFFD UP ADEQUATELY SINCE THE CRISIS 5 YEARS AGO FORCED THEM TO LAY OFF THOUSANDS OF QUALIFIED AND EXPERIENCED EMPLOYEES.2015-09-18 16:36, By: dlzallestaxes, IP: [22.214.171.124]
L2: IRA funds transfer sanity checkif you don’t have the funds to complete construction, I recommend getting a construction loan at the start. The bank is going to want to see nothing but a pile of dirt when they get involved. It’s because of the liability with other contractors you may have hired. Forget about using a 72t for construction. Be careful and one thing that happens a lot is going over than what you expect it to cost.2015-09-19 19:05, By: charjenk, IP: [126.96.36.199]
L3: IRA funds transfer sanity checkActually, that’s not correct – at least in my area. I’ve spoken with two local construction loan lenders, and neither has a problem stepping in after construction has begun. That was a concern of mine before I thought of tapping the IRAs, as I wanted to spend down my cash on hand first so I could get better deals and have control over the majority of the project.
Both banks encouraged me to keep detailed records, and for any work done prior to funding that was subbed out they’ll want lien releases. Otherwise, neither of them cared – it’s a non-issue.
What are issues, are construction loan fees ($10-15K), draws that will only be made to a contractor they approve of (not directly to me), and the 1st mortgage that the construction loan will roll over to once everything is complete. These 1st mortgages are almost 1% more than I can get on the open market. If I choose to refi immediately after construction is complete to get a decent long term rate, add another $5-7K.
My calcs show my total loss on busting the 2nd SEPP would be about $14K + income tax on the withdrawal – less than the fees and refi going the construction loan route. And, while I’d also lose out on accrued interest from the withdrawn funds, that could be somewhat offset by starting up Roth IRAs, contributing the monthly amount we expected to be paying on a 1st mortgage – since we wouldn’t have one.2015-09-20 18:56, By: syspig, IP: [188.8.131.52]
L2: Estimated SEPP RateThe estimated October rate shows areduction to2.00%. Therefore if your planwill startin November,plan touse the Sept rate. And if your plan will start in December, you may want to move it forward to November in order to use the higher Sept rate.
Seems like rates should be rising with a potential Fed increase in a couple weeks. If they move, you would expect an increase.
If you are using certain browsers, they may not work with some links on this site.2015-09-09 21:55, By: Alan S, IP: [184.108.40.206]
L2: Estimated SEPP RateThe estimated rate is a function of published treasury rates and the program that we use had to be re-adjusted to read those rates.
The estimated rates should now be back on track.2015-09-09 22:25, By: Gfw, IP: [220.127.116.11]