Many people buy a home with the intention of paying off their mortgage. But sometimes things happen.
If you lose your job or have a series of unexpected bills, you can find yourself in a situation where it’s difficult to keep up with your home payments. Additionally, if you are late on your payments, you may be subject to foreclosure.
There are two problems with foreclosures. First, if a lender forecloses on your home, that means you have lost your home.
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Foreclosures can also severely damage your credit score. A foreclosure also stays on your credit report for seven years, meaning you could have a long time struggling to do everything from getting approved for a credit card to securing a rental.
Now, if you truly don’t have the funds to pay your mortgage, foreclosure may be inevitable. But what if you have a reasonable balance in your IRA, meaning you have enough money to keep up with your house payments and get by until your financial situation improves?
You may be tempted to tap your IRA to avoid garnishment. But should you?
There is a risk of hefty penalties being imposed.
IRAs offer tax breaks because the IRS wants to encourage workers to save for retirement. So if you put money into a traditional IRA, the IRS won’t tax your contributions.
Instead, the IRS wants the money to sit there until you reach retirement age. If you withdraw before age 59 1/2, you risk a 10% penalty on the amount withdrawn. For example, a withdrawal of $25,000 will incur a $2,500 penalty.
Additionally, IRA withdrawals are taxed, so you’ll lose some of the money you withdraw to the IRS. This is not a fine. The same taxes apply even after you retire. But still it is a negative result.
There is a risk of running out of funds after retirement
The more money you take out of your IRA before retirement, the greater the risk of not having enough money to live on. meanwhile retirement. Remember, too, that when you raid an IRA, you don’t just lose the principal you remove. You also miss out on potential growth.
If your IRA is invested with an average annual return of 10%, which matches the long-term average of the stock market, withdrawing $25,000 to avoid foreclosure does not simply mean you will be $25,000 short in retirement. . In fact, if it takes him 20 years to retire, he will have nearly $170,000 less left in his pocket.
Alternatives to raiding the IRA
Taking funds from an IRA before retirement can have very disappointing consequences. The same goes for foreclosure. It is difficult to determine whether an IRA should be raided to avoid foreclosure.
But what? teeth Certainly, it is beneficial to take some steps before reaching that point. One step is to contact your lender to discuss a short sale.
In a short sale, the lender accepts a set price for your home and writes off the remaining mortgage balance. If your home is only worth $250,000 and you owe $320,000 on your mortgage, the lender will write off his $70,000 difference.
Short sales also remain on your credit report for seven years. However, short sales are not considered as disadvantageous as foreclosures, so the damages may not be as great.
You may want to consider ways to monetize your home so you can continue living in it. Renting out part of your living space could be a great way to get the financing you need, so if you have a finished basement or garage, it’s worth considering. If there is a need, you can also rent a parking space in your driveway.
You may decide to raid your IRA to avoid foreclosure and stay in your home. If you feel your current financial situation is temporary and likely to improve, it may be worth taking a hit with your IRA, even if it comes with a penalty. That way, you can stay current and avoid years of damage to your credit score.
But think twice before tapping into an IRA before you retire. That could leave you in a situation even worse than a mid-life foreclosure.
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