When we think of retirement accounts, we often consider that money untouchable ― without penalties, at least ― until age 59 ½. However, if you have an IRA, it is possible to use some of the money as a first-time home buyer.
With mortgage lenders tightening their standards, it can be difficult to qualify for a home mortgage loan without a substantial down payment. Many first-time home buyers find that they just don’t have enough cash saved up on their own. This is where an IRA distribution can help. If you qualify, you can use some of the money from your IRA to make a down payment on your first home.
Withdrawing Money from Your IRA to Pay First-Time Home Buyer Expenses
Before you consider withdrawing money for your home expenses, it is worth noting that Roth IRA contributions can be withdrawn anytime (for any purpose) with no penalties. You cannot use the money that you have earned in returns for this purpose, but the money you have deposited into the Roth IRA yourself can be withdrawn at any time, including for first-time home buyer expenses.
If you have a traditional IRA or a SEP-IRA, however, the rules are different. You cannot withdraw even your contributions without penalty, except in particular circumstances. One of those circumstances is when you are a first-time home buyer. The following rules apply to the withdrawal of money from an IRA for a first-time home buyer purchase:
- You can’t have owned a home for at least two years (so you can take advantage of this even if you aren’t technically a first-time home buyer).
- You can withdraw up to $10,000 from your IRA without penalty. This $10,000 limit is a lifetime limit, though. Once you hit the limit, you can’t withdraw for home buying expenses in the future.
- There is a 120 day time limit, so you have to buy a home within approximately four months of withdrawing the money.
- The home you purchase has to be used as your principal residence.
- You can withdraw the money for a child or spouse to purchase a principal residence as a first-time home buyer.
While withdrawing money from your IRA can be a good way to pay for closing costs, a down payment, or additional expenses associated with being a first-time home buyer, it is not necessarily the best course of action. Carefully consider this move ― once that money is withdrawn, it is no long earning a return in your retirement account which means you can miss out on the compounding interest down the road.