IRAs

How Home Buyers Can Tap an IRA Penalty Free

You can withdraw money from your retirement savings to pay for a house, but the rules are different for Roth and traditional IRAs.

Question: My husband and I would like to help our son make a down payment on his first home, and we're thinking of tapping our IRAs, but we're not 59½ yet, so we’re worried about incurring a penalty. What are the rules for withdrawing money from an IRA to buy a house?

Answer: The rules are different for traditional IRAs and Roth IRAs. With a Roth, you can withdraw contributions for any reason at any time without taxes or penalties. And you and your husband can each take up to $10,000 in earnings from your Roth IRAs for a first-time home purchase without a 10% early-withdrawal penalty. If you’ve had your Roths for at least a five-year period (five calendar years, counting the year you made the first contributions), the earnings are tax-free, too.

You can generally borrow up to half of your 401(k) balance, up to a maximum of $50,000, for any reason without taxes or penalties. The interest you pay on the loan (typically the prime rate plus one or two percentage points) goes back into your account. Most loans from 401(k)s must be paid back within five years, but your employer may give you up to 15 years to repay a 401(k) loan to buy a home for yourself. However, you generally have just 60 or 90 days to repay the loan if you leave or lose your job; if you don’t repay the loan within that time and you’re not at least 55 by the end of the year you leave your job, the loan will be considered a withdrawal subject to taxes, and you’ll also have to pay a 10% early-withdrawal penalty.

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