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How Do IRA Accounts Work? (Individual Retirement Accounts)

Reviewed by: David Naimey

Approved by: Chad Turner

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For this blog update, we’ll discuss the other types of IRAs, SEP IRAs and Simple IRAs. We’ll also go into detail what your mortgage lender will require from you if you choose to use these IRA accounts to help get into your home!

SEP IRA Accounts

SEP IRA Accounts, also known as Simplified-Employee-Pension IRA Accounts, is a retirement plan that an employer or self-employed person can open. SEP IRA retirement plans are mostly used by smaller businesses due to its flexibility and lower cost than other employee retirement plan options. SEP IRAs have a bit more flexibility because they have higher contribution limits than normal, allowing for higher contributions towards this account. Additionally, SEP IRA have more favorable eligibility requirements for those who are trying to contribute to the account. Additionally, employers who open their own SEP IRA take advantage of the higher contribution limits as well. However, even though SEP IRAs are employer-based, they still follow the same traditional IRA rules.

SIMPLE IRA Accounts

SIMPLE IRA accounts are similar to SEP IRA accounts where it can be for the employees of small businesses. SIMPLE stands for Savings Incentive Match Plan for Employees. Employers may choose to have contribution matches for the SIMPLE IRA accounts, with the maximum being 3%. Additionally, employees who contribute have a much higher contribution limit than traditional IRA accounts. For example, in 2018, the annual contribution limit was $18,000, which is 3 times higher than for traditional and Roth IRA accounts. SIMPLE IRA accounts differ from SEP IRA accounts by having a specific employee limit of 100 or less for the small business looking to set it up. Additionally, the employer themselves have a smaller annual contribution limit than SEP IRA accounts, at the trade-off of easier eligibility requirements for contributors.

What Are the Benefits of an IRA Account?

Having an IRA Account offers plenty of benefits. Similar to 401K Accounts, opening an IRA allows for tax deferred income advantages to an individual while also providing with a fully self-manageable financial option for saving money for retirement. An IRA account allows for more financial control than most other retirement plans, especially ones that are fully managed by your employer. Additionally, taking advantage of annual contribution to an IRA allows for more tax deductible options, depending on which account you have. In short, the earned income you have being placed into an IRA allow you to fully control how much you save for retirement in the long term, and in real time as well. You can purchase stocks, bonds, Exchange-Traded funds, or other financial products and services based on what you feel is best. As mentioned before, it’s very important that if you choose to open an account, that you stay on top of managing it.

How Can I Use My IRA Account For Buying A Home?

IRA Accounts can be used for several purposes during the home buying process. If the mortgage lender is requesting you to show reserves, or the ability to pay your mortgage in case of unforeseen circumstances like job loss, you can use your IRA account to show these funds. Additionally, you can also opt to use your IRA account to cover the down payment of a home as well, as long as it’s allowable by your IRA plan to make that withdrawal. In both of these situations, the underwriter will require the most recent quarterly statement for your IRA, along with the Plan Summary, which will explain the terms of withdrawal. The underwriter needs the terms of withdrawal information to determine whether or not your plan allows withdrawal of funds, with or without penalty, for the down payment of a home. If you are using your IRA for a down payment, you will also need a copy of the distribution check and your newest official bank statement that shows the amount going into your account. Keep in mind that if you choose to have the IRA be used for a down payment on the home, that you will need to make sure your bank statements on file do not have any gaps. This means you’ll need an official transaction history that begins on the day your last official statement ended on, all the way up through the deposit of the IRA funds to show that the cash required is there. As a reminder, your transaction history will need to have the bank logo, a running balance, and be signed and stamped on all pages by your bank teller
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