Can I Borrow From My IRA to Buy a House?

While you cannot borrow from an Individual Retirement Arrangement (IRA) as you might from a 401(k), you can take a distribution to help purchase a home. IRA rules do not permit loans, so any money taken out is a permanent withdrawal. However, the tax code provides specific exceptions that can make using these funds for a home purchase a viable option, particularly for those who qualify as a first-time homebuyer. These rules allow for a penalty-free withdrawal under certain conditions, but the tax implications vary depending on the type of IRA you hold.

Understanding IRA Withdrawals vs Loans

The structure of an IRA differs from an employer-sponsored 401(k) plan, which is why loans are not a feature of IRAs. A 401(k) plan may allow participants to borrow against their balance and repay it with interest. In contrast, an IRA is an individual account, and tax laws do not include provisions for loans.

Accessing money from an IRA before age 59½ is a distribution, or a permanent withdrawal. Normally, this triggers two financial consequences. The first is a 10% early withdrawal penalty. The second is that the distribution is added to your gross income for the year and taxed at your ordinary income tax rate.

These two costs, the penalty and the income tax, are designed to discourage using retirement funds for non-retirement purposes. The exceptions to these rules are specific and must be met precisely to avoid these financial repercussions.

The First-Time Homebuyer Exception

The primary way to use IRA funds for a home purchase without the 10% early withdrawal penalty is the first-time homebuyer exception. This allows a penalty-free withdrawal of up to a $10,000 lifetime maximum per person. If you and your spouse are both first-time homebuyers with separate IRAs, you can combine your withdrawals for a total of $20,000.

The IRS defines a “first-time homebuyer” broadly. To qualify, you (and your spouse, if married) must not have owned a principal residence during the two-year period ending on the date you acquire the new home. This means you can qualify even if you have owned a home in the past, as long as you have not owned one in the last two years.

The funds must be used for “qualified acquisition costs,” which include buying, building, or rebuilding a principal residence. These costs can cover the down payment, financing fees, and closing costs. The home can be for the IRA owner or a qualified family member, such as a spouse, child, grandchild, or parent who also meets the first-time homebuyer definition.

A strict timeline governs the use of these funds, which must be used for qualified costs within 120 days of receiving the distribution. For a purchase, the “date of acquisition” is the day you enter a binding contract. If building or rebuilding, it is the date construction begins. If the home purchase is canceled or delayed, you can redeposit the funds into your IRA within the 120-day window to avoid taxes and penalties.

Tax Implications for Different IRA Types

Even when the 10% early withdrawal penalty is waived under the first-time homebuyer exception, the tax treatment of the distribution itself depends entirely on the type of IRA you own. The penalty and the income tax are two separate considerations.

Traditional IRA

When you withdraw from a Traditional IRA, the amount is included in your gross income for that year. Even using the first-time homebuyer exception, the $10,000 withdrawal is added to your income and subject to federal and state income taxes. This can result in a notable tax liability and may push you into a higher tax bracket.

Roth IRA

Roth IRA withdrawals follow specific ordering rules. Your direct contributions are withdrawn first, and since they were made with after-tax money, they are always tax-free and penalty-free. If your withdrawal exceeds your contributions and you tap into investment earnings, the first-time homebuyer exception applies. You can withdraw up to $10,000 of earnings without the 10% penalty.

For these earnings to also be tax-free, the Roth IRA must meet the 5-year rule, which requires five years to have passed since your first contribution. If you meet both the homebuyer criteria and the 5-year rule, the earnings withdrawal is completely tax-free. If you have not met the 5-year rule, the earnings are subject to income tax, but you still avoid the penalty.

The 60-Day Rollover Rule as a Short-Term Option

The 60-day rollover rule allows you to use IRA funds for a short period. This rule permits you to take a distribution from your IRA and avoid taxes and penalties if you redeposit the full amount into an IRA within 60 days. This can function as a short-term, interest-free loan, which can be useful for a down payment before mortgage financing is disbursed.

The risks with this strategy are high, as the 60-day deadline is absolute and starts the day you receive the funds. If you miss the deadline, the entire distribution becomes taxable as ordinary income and is subject to the 10% early withdrawal penalty if you are under age 59½. You are limited to one such indirect rollover per 365-day period across all of your IRAs combined.

If your financial institution withholds taxes from the distribution, you must use other funds to make up the difference for the redeposit. For example, if you withdraw $50,000 and 20% ($10,000) is withheld for taxes, you receive $40,000. To complete a valid rollover and avoid tax consequences, you must deposit the full $50,000, requiring you to find the $10,000 elsewhere.