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How to Tap an IRA for a Home Purchase
You can withdraw up to $10,000 penalty-free to buy or build a first home, but make sure you know the rules.
By Kimberly Lankford, Contributing Editor, Kiplinger's Personal Finance
July 13, 2009
I am going to buy my first house this month and will withdraw some money from my IRA to make the down payment. I'm not 59½, but I understand that I can avoid the early-withdrawal penalty because the money will be used to buy my first home. What is the rule about using IRA money for a home purchase, and what proof do I need to provide at tax time to show that the withdrawal was for that reason?
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If you have a traditional IRA, you normally would have to pay a 10% penalty on any distribution before you turn 59½ (except to the extent that any of the withdrawal could be attributed to nondeductible contributions). However, you can withdraw up to $10,000 penalty-free over your lifetime to buy or build a first home for yourself, your spouse, your kids, your grandchildren or even your parents. If you're married, your spouse can also withdraw up to $10,000 from his or her IRA penalty-free toward the purchase. The withdrawal will still be taxed in your top tax bracket.
To qualify for the exception, the money must be used to buy or build the home within 120 days of the withdrawal. The definition of "first-time homebuyer" is quite broad: It means a person who hasn't owned a home for the past two years.
The rules are different for Roth IRAs. You can draw from your Roth IRA contributions at any age for any reason without paying any taxes or penalties. So, if you are tapping a Roth IRA and your withdrawal does not exceed the total of your contributions over the years, you don't need the exception. The money is simply tax- and penalty-free.
If you're dipping into Roth earnings before age 59½, though, you need the exception to protect you from the 10% penalty on up to $10,000. Whether that money will be taxed depends on how long you've had the Roth. If the account passes the five-year test (five calendar years have passed since the start of the year for which the first contribution was made), the earnings are tax-free, too. If it doesn't pass the five-year test, the earnings are taxable even though the penalty is waived. Similar rules apply if you convert a traditional IRA to a Roth. For more information about IRA distribution rules, see IRS Publication 590, Individual Retirement Arrangements.
You don't need to provide proof to the IRA administrator that you're using the money for a home purchase, according to Vanguard, but you do need to file IRS Form 5329 with your tax return for the year of the withdrawal. See the Instructions for Form 5329 for more information. If you're withdrawing the money from a Roth IRA, you also need to complete IRS Form 8606 to show how much of the distribution came from contributions, how much was from conversions made more than five years ago, how much from conversions made fewer than five years ago, and how much from earnings. If you withdraw after-tax money from a traditional IRA, you'll also need to file Form 8606 to show the amount of after-tax money distributed, which will affect your tax basis in the future. See the Instructions for Form 8606 for more information about the calculation.
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Reader Comments (6)
Posted by: Joe at 07/16/2009 12:49:09 PM
What about Roth 401(k)s? Do the same rules apply to those? If not, what are the differences if I want to use my Roth 401(k) to purchase my first home?
Posted by: noypako at 01/10/2010 10:19:44 PM
If I withdraw $10,000 from my IRA as downpayment for a house loan, is there a grace period that I have to use it like within 30 days? The reason I asked is because I will enter into a contract this week, but the closing will be by June as the house construction will be done by then. Please advise.
Posted by: nina at 01/14/2010 02:20:38 PM
hi I recently withdrew $10K from my traditional IRA to but my first house. The deal fell through at the last minute. Then the $8000 tax credit was extended through May 2010 and I would like to take advantage of it. I understand I could roll it back to my IRA within 120 days without penalty. But now my money has been out of my IRA for 90 days and I don't think I could close within 30 days to qualify. What's my best course of action?
Posted by: mer at 02/25/2010 10:51:44 AM
My daughter and her husband are getting a divorce, and he will give her owed funds from his 401k. can she roll this money into a Roth IRA and then withraw money to buy a house without paying the 10 percent penalty?
Posted by: Jeff at 06/23/2010 04:41:18 PM
Great article. One question: can I still withdrawal the funds from an IRA after escrow closes? I can't find an answer to that one, and reading IRS Pub 590 on IRA's doesn't address it. It only says it must be used "before the close of the 120th day after the day you received it". So if i receive the funds 2 days after funding escrow, that would be still be before the 120th day, though it would actually be 122 days. Any idea? I'll be funding next week and Fidelity told me it takes 5-7 days to receive a check, or 5-7 days to go thru EFT verification. Thanks.
Posted by: Michelle at 06/24/2010 06:54:38 PM
1- My husband owned our home when we married and I'm not on the deed, but I am on the mortgage, due to refinance. I've never purchased a home, so can I take the 10K penalty free withdraw on my Roth IRA for us to purchase a home? 2- Once we sell our current home we should recoup the funds used for the down payment, which will come from my Roth IRA penalty free withdraw. Once we have the sale of our current house profit in hand, can I put the money back into the Roth IRA? If so, how long do I have to do so? Thank you!