Individual retirement arrangements, commonly called IRAs, provide a means of saving for retirement or other future expenses. A non-recourse mortgage provides a means of borrowing money to purchase a property without the risk of being sued for the total amount of the loan if you fail to pay on the mortgage. Saving by means of an IRA or borrowing by means of a non-recourse mortgage each has an effect on your yearly income tax.
Employer or Traditional IRAs
People often take out a IRA on their own through a broker or bank. IRAs also may be offered through the company for whom an individual works. A traditional IRA affords a person the ability to save funds on a pre-tax basis. Since the money in a traditional IRA goes into the account before taxation, however, the entire amount of savings, both contributions and earnings, get taxed when the money is withdrawn. So, the individual must pay taxes on the full amount of each distribution received after retirement. If the individual takes funds out prior to the age of 59 1/2, he also owes a 10-percent penalty fee.
In contrast to traditional IRA plans, Roth IRAs do not give an individual the option of placing money into the account before taxes. Instead, the individual must make contributions to the account with earned income that has already had the taxes taken out by an employer. Though this may make it take longer to put away a certain amount of money each year, since these contributions have already been taxed, the individual does not pay taxes on them again, nor does he pay taxes on the earnings his contributions accrue, as long is he reaches age 59 1/2 and has had the Roth IRA account for five years before withdrawing any earnings.
When a borrower gets a non-recourse mortgage, the lender must use only the property that the borrower plans to buy as collateral for the loan. If the borrower does not make the payments on the mortgage, the lender may foreclose on and sell the property but may not sue for any difference between the sales price of the property and the balance of the mortgage. The lender must instead write off the difference and take the loss. Any loss by the lender is considered a capital gain by the borrower for tax purposes.
When an individual receives distributions from an IRA, the individual must include these distributions as standard income on his tax return, adding the total amount of the distribution to his income for a traditional IRA or the amount of any earnings withdrawn early for a Roth IRA. The individual receives a form from the financial institution managing the IRA that states the amount of income that the individual must report. If the individual defaults on a non-recourse mortgage, the difference in the sales price and balance must be reported the capital gain and complete Schedule D of Form 1040.
- Jupiterimages/liquidlibrary/Getty Images