How to Use Your IRA to Buy a House
By Kathi on Jun 17, 2021 | 04:37 AM IST
If you're shopping for a new home, you may be looking for
ways to fund the purchase. Taking out cash from a retirement account such as an
IRA might be an option in some cases. However, before you withdraw money from
an IRA, you'll want to evaluate the short-term and long-term consequences. Use
the following criteria to help decide whether to use your IRA to buy a house.
When you open an IRA, the account is established to help
you save for the future. Normally you'll need to wait until you are age 59 1/2
to start withdrawing funds. If you withdraw money from the account before age
59 1/2, you will typically have to pay a 10% penalty on the amount withdrawn.
The distribution will also be subject to taxes.
However, there are certain circumstances in which you might
be able to take out funds from the account before reaching age 59 1/2 and not
incur penalties. One exception to the early withdrawal penalty is for the
purchase of a first home. "Although it's possible, using money in your IRA
to purchase a home is generally not advisable," says Doug Jackson,
president of Tennessee Tax Solutions in Nashville, Tennessee. "Accessing
large sums of money in an IRA prior to retirement can set you back big
time."
For instance, perhaps you decide to withdraw $5,000 from an
IRA to help put together a down payment for your first home. That amount will
not have the chance to grow and earn interest over decades. This means you
could potentially lose thousands or tens of thousands of dollars that could
have been added to your account balance before your retirement.
If you decide to take savings from your IRA to put toward
the purchase of a home, you'll first need to make sure you qualify. The IRS allows
a withdrawal of up to $10,000 from an IRA to buy a home for the first time. To
be considered a first-time homebuyer, you cannot have owned a primary residence
at any time during the previous two years. "This $10,000 exception is
available for every individual, so a married couple can withdraw $10,000 from
each of their IRAs for a total of $20,000 that can be used for a down
payment," Jackson says.
In addition to purchasing your own home, you may qualify to
help others buy their first house. "IRA owners can withdraw funds
penalty-free to help their first-time home buying children, grandchildren or
parents purchase a home," says Michael Walsh, a wealth advisor at Walsh
& Associates in Sarasota, Florida. "However, $10,000 is the lifetime
maximum for first-time homebuyer withdrawals." The total of your
withdrawals must remain under the $
While there will not be a penalty on early IRA
distributions for a first home purchase, you can expect to pay taxes on the
amount withdrawn. For example, if you are in the 22% tax bracket, a $10,000
withdrawal for a home purchase will lead to $2,200 in taxes. For a couple in
the 24% tax bracket who withdraws $20,000, the taxes due would come to $4,800.
For those who want to take funds from a Roth IRA rather
than a traditional IRA, the rules are slightly different. "You can
withdraw money from your Roth IRA before retirement age without penalties as
long as the account is at least five years old," says Dominic Trupiano,
the vice president of sales at Artesys in St. Louis, Missouri. You will be able
to withdraw any amount up to the total amount you contributed without being
subject to taxes.
In addition to your Roth IRA contributions, you might opt
to take out some of the earnings in the Roth IRA. "You can withdraw an
additional $10,000 from the earnings under the first-time homebuyer
exemption," Trupiano says. Before doing so, you may want to look at
calculations to see how your retirement funds could be impacted.
"Withdrawing $10,000 from an IRA at age 30 could cost a person $57,000 at
retirement, assuming a 6% rate of return," Trupiano says.
Instead of accessing cash from your IRA, you could search
for other ways to fund a home purchase. You might withdraw from a different
account, such as a short-term savings account, money market account or a 401(k)
plan. Some 401(k) plans may allow for a loan to help with a home purchase.
"Loans from a 401(k) typically incur no penalty or taxes, but the borrower
will need to pay interest on the loan," Trupiano says. "Similar to
the IRA, borrowing money from a 401(k) could potentially hurt retirement
prospects." You may also decide to apply for a regular home loan to help
cover the costs of the purchase.