How To Purchase A Home Using Your IRA
Ryan Velez | 3/9/2017, midnight
In a recent Q&A article from The Network Journal, the question came up of a husband and wife looking to help their son make a down payment on his first home. To do this, they were pondering tapping into their IRAs but had not reached 59 1/2 yet. As a result, they were concerned whether or not their plan would lead to incurring a penalty. This led to a conversation on the rules of withdrawing from an IRA for a house.
One thing to note is that the rules of withdrawal are different when it comes to traditional IRAs and Roth IRAs. With a Roth IRA, you can withdraw contributions at any time without incurring any penalties. This applies no matter what you are withdrawing for. In the case of the couple, both could each take up to $10,000 in earnings from their Roth IRAs for a first-time home purchase without a 10% early-withdrawal penalty. If the Roths were around for at least a five-year period (five calendar years), these earnings would be tax-free as well.
The secondary option here would be withdrawing up to $10,000 penalty-free from a traditional IRA. Note that this will not be subject to an early-withdrawal penalty, but will be taxable. Another major difference is that this $10,000 is the maximum that can be taken over the course of your lifetime, from either a Roth, traditional IRA, or combination of the two, for yourself or an eligible relative. Jeff Levine, director of retirement education for Ed Slott and Company, which provides IRA advice, goes into greater detail:
“You can take multiple withdrawals for a first-time home purchase as long as the total does not exceed the lifetime cap of $10,000 per person,” Levine says. “The money must be used by yourself or your spouse, kids, grandchildren or parents. A “first-time” homebuyer is defined as someone who hasn’t owned a home for the past two years. The money must be used to buy or build the home within 120 days of the withdrawal.”
The tradeoff of either type of IRA withdrawal is that of course, the money will no longer be there to grow tax-free or deferred for your own retirement. One other potential option will be to take a 401(k) loan, which will allow you to access the money without removing it permanently from retirement savings due to the fact that it must be paid back. This comes with its own series of hitches, like needing to be paid back far quicker should you lose your job.