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I'm planning to move to a different region in the US on a tight schedule. I have enough equity in my current primary residence to pay for a down payment on a new home, but since I'm on a tight schedule, I can't wait to put down an offer until the sale closes. I'd also like to be able to waive contingencies in a purchase offer.

I'm not 59 1/2 yet, but it's still possible to take an IRA distribution tax-free if I put the money back within 60 days (in which case it counts as a rollover for tax purposes, even if I put it back in the same account).

The timeline would look something like this:

  1. Accept an offer on house 1
  2. Withdraw from my IRA
  3. Make an offer on house 2 with contingencies waived and a fully underwritten pre-approval from a lender
  4. Escrow closes on house 1
  5. Deposit money back into the IRA
  6. Wire money to escrow for house 2
  7. Escrow closes on house 2

It seems pretty airtight, especially if I plan ahead of time to back out of the purchase of house 2 (and eat the loss of the earnest money) rather than keep the IRA money and risk a massive tax bill.

What are the pros and cons of this approach? Any other ideas?

Note I've also considered:

  • Taking out a HELOC or bridge loan - but banks don't seem too keen on this right now.
  • Asking the buyer of house 1 for a rent-back - but in our case we're on a tight schedule and can't afford to add a month to the timeline.
  • Using a service like FlyHomes to get a loan with which to make an all-cash offer.
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    "I'd also like to be able to waive contingencies in a purchase offer." I'd be very careful with this...
    – 0xFEE1DEAD
    Commented Mar 16, 2023 at 20:52
  • 2
    @0xFEE1DEAD good luck buying a house in California with contingencies...
    – littleadv
    Commented Mar 16, 2023 at 20:52

2 Answers 2

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You can do this, and people have done this before.

Main things to consider:

  • You can only do one indirect roll-over in 12 months period,
  • If you mess up on dates or amounts and miss the 60 days window you'll be on the hook for taxes and penalty,
  • Your custodian may force tax withholding on your distribution, meaning you'll get less than you thought but would still need to deposit the full amount to complete the rollover (you'll get the withholding back when you submit your tax return, in this case)
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  • I know your third point is true for 401(k) withdrawals. I thought IRA custodians didn't do this. (But, of course, I have experience with just 2, so that counts for nothing.) Commented Mar 17, 2023 at 10:41
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The timeline would look something like this:

  1. Accept an offer on house 1
  2. Withdraw from my IRA
  3. Make an offer on house 2 with contingencies waived and a fully underwritten pre-approval from a lender
  4. Escrow closes on house 1
  5. Deposit money back into the IRA
  6. Wire money to escrow for house 2
  7. Escrow closes on house 2

I took your timeline and question at face value.

Using the timeline you have defined the big risk is that when you are pulling the money out of the IRA you aren't in control of the schedule. Even a pre-approval before making an offer and the waiving of every contingency doesn't guarantee that you can get everything done in time. You have to find a house. The owner has to accept your offer. The lender still wants to do an appraisal. They will also want to get title insurance. Missing that deadline carries a significant risk

Then I saw the issue.

You specified that the money is for the down payment on house two. But in reality if the timeline is right it is for the earnest money deposit for house 2. Because the down payment on the mortgage for house 2 isn't due until step 6. But you get the money from house 1 and the money back into the IRA before step 6. The first big check comes with the offer on step 3. I would think the IRA withdraw in step 2 would make the lender nervous about your ability to afford the mortgage. Of course getting enough cash from the sale of house 1 to redeposit into the IRA will make them less nervous.

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    Nah. Earnest money can quite small--even as low as a thousand dollars. Lenders will want to know where the down payment money is coming from; getting it out of the IRA into a checking account is the goal, I think.
    – mkennedy
    Commented Mar 17, 2023 at 16:44
  • @mkennedy But if the IRA has to be tapped to get the earnest money deposit, that might concern them. Commented Mar 17, 2023 at 16:52
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    "But in reality if the timeline is right it is for the earnest money deposit for house 2" I have way more than enough money for that without the IRA - it'll be $5k at the absolute maximum, but likely more like $3000. The down payment (and likely just showing a lender I have the money) is what the IRA distribution is for. Down payment will be around $130k - that's what I can't fund without the sale of the first house (with an IRA rollover to tide me over till house 1 closes).
    – Roy Tinker
    Commented Mar 17, 2023 at 18:08
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    But you don't need to pull the money out of the IRA before making an offer. You only have to be able to point to the planned source of the down payment when getting the loan approved. Commented Mar 17, 2023 at 18:13
  • "You only have to be able to point to the planned source of the down payment" ooh, didn't know that. Thanks, that helps a lot. So then the IRA rollover would only need to happen if for some reason the down payment date on house #2 happens before house #1 closes.
    – Roy Tinker
    Commented Mar 17, 2023 at 18:23

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