OK, so I'm in the process of buying a house. I've decided that I'm going to escrow my own taxes and insurance. Why have the mortgage company gain interest when I can instead? I know there are homeowners here that are currently doing this so I have a question: What kind of account are you 'escrowing' with? I was thinking about a Roth IRA with a conservative mutual fund (since my 401K is pretty aggressive and I don't want to touch it until I retire). The problem is that some people are telling me there's a 10% early withdrawal penalty and some are saying there isn't. I can't seem to get a straight answer. I know there is a penalty with a regular IRA but I'm not sure about a Roth. If there is, should I go with an interest bearing savings account instead? I know I wouldn't make jack squat in interest compared to a Roth but I wouldn't have to pay any withdrawal fees at the end of the year either. Keep in mind, I'm only going to be making one withdrawal per year. Any help would be much appreciated! Still kind of new to this.
IRAs don't work for escrow's. You won't get much of areturn but look into a savings account or money market account or some type of account where you get some type of interest and you can take the money out without penalty. Probably be best off avoiding accounts with minimum balances since the real estate taxes come out every 6 months which will leave you with a small balance until you fund it the next month (if you do put additional money int he account you may not need to worry about minimum balances). One possibility is see if teh banks have like 4-6 month CDS where you can add money along the way. Keep in mind you don't want to do this until you know when the payments are needed (mine is June/July and December/January) Just as a note I would probably avoid mutual funds since most of them will charge you for transactions when you need to make payouts.
Here's the thing about Roth IRA. There is an early withdrawal fee. Part of the deal is that it's tax free, but only if you promise not to touch it until you retire, so that you're not a burden on the government at that point. The reason people might be telling you otherwise is that there is a one time loophole if you're buying a home where you can use money from your Roth IRA without penalty. But there's no way you'll be able to do that on a yearly basis.
You might look into one of those IGN online saving accounts for your escrow. They have high interest rates due to minimal overhead, and they are insured. I wish we could have controlled our own, but we went through Countrywide and didn't have the option.
I have a straight savings account at my Credit Union. I keep it seperate from my regular bank so I can't get my dirty little hands on it easily. They pull the cash from my paycheck and dump it in there and let it collect interest, and I withdraw it and dump it into my checking account when I am ready to pay taxes.
I also do my own escrow and also just use a savings account. I probably make $2 a year in interest on that baby. It counts up to a lot of money to keep liquid, but not really so much to be a very significant investment tool, considering you have to drain it every year.
I just checked ING Direct, and their current interest rate is 2.2% on savings, or 2.5% on a 1-year CD.
I escrow with a saving account at my bank. At the beginning of each month I transfer the escrow amount into the saving (when I write the mortgage check). Using a Roth IRA for escrow is an impedance mismatch. IRAs are for retirement (long term) and escrow is an account that is drained and rebuilt yearly (short term). If you want to invest in a mutual fund, do so directly. You might need to keep $3000 or so in the fund at all times to meet the fund's minimum requirement. The benefit here is that you will not have to pay a 10% penalty on your earnings when you withdraw. I also would not be surprised if when the IRS sees you getting the 10% penalty each and every year that they will red flag you for an audit.
Yikes, looks like the Roth is a bad idea all the way around. I guess I'll just go with an interest bearing money market account. Or just a regular ol' savings account with no minimum balance to worry about. My employer has a credit union, maybe I'll just open one here. Opening one away from my regular bank sounds like a good idea. Less temptation...
defnitely do it way from your normal bank, and do direct deposit so you never have your hands on the money. As far as you're concerned it doesn't even exist.
ima_drummer2k, if you're considering setting up an ING account, let me send you a referral. You'll get $100 for a Home Equity account and $25 for a savings account. I also get a smaller referral bonus($25 or $10 respectively).
