Can I Borrow From My IRA to Buy a House?

Individual Retirement Accounts (IRAs) frequently come into consideration when exploring financial avenues for homeownership. While an IRA is designed primarily for retirement savings, specific Internal Revenue Service (IRS) provisions allow individuals to access these funds for a first-time home purchase without incurring the typical early withdrawal penalty. This is not a traditional loan requiring repayment; rather, it is an exception to the rules governing early distributions from retirement accounts. This exception can provide a valuable resource for those looking to acquire their first home, but it comes with precise eligibility requirements and tax implications that warrant careful consideration.

Understanding the First-Time Homebuyer IRA Withdrawal

The IRS defines a “first-time homebuyer” for this specific purpose as an individual who has not had an ownership interest in a main home during the two-year period ending on the date of acquiring the new home. This definition applies not only to the individual making the withdrawal but also to their spouse, if married. Even if you have owned a home previously, you can still qualify as a first-time homebuyer under this rule, provided you meet the two-year non-ownership criteria.

This special provision permits a penalty-free withdrawal of up to $10,000 from an IRA. This is a lifetime limit per individual. For married couples, each spouse who meets the first-time homebuyer definition can withdraw up to $10,000 from their own IRA, potentially allowing a total of $20,000 to be used towards the home purchase. These funds must be used for “qualified acquisition costs” related to buying, building, or rebuilding a principal residence.

Qualified acquisition costs encompass expenses directly associated with the home purchase, including costs to acquire, construct, or reconstruct the home. This also covers usual settlement, financing, and other closing costs. These funds cannot be used to pay off an existing mortgage. The home purchased must serve as the primary residence for the first-time homebuyer, who can be yourself, your spouse, a child, grandchild, or parent.

Tax Implications for Different IRA Types

The tax treatment of a first-time homebuyer IRA withdrawal depends on the type of IRA. While the 10% early withdrawal penalty is waived for qualified first-time home purchases, the withdrawn amount may still be subject to ordinary income tax. This distinction is important for understanding the net financial impact.

For withdrawals from a Traditional IRA, the amount distributed is typically subject to ordinary income tax. Contributions to a Traditional IRA are often made with pre-tax dollars, deferring taxes until withdrawal. Even though the 10% early withdrawal penalty is waived, the withdrawn amount is added to your taxable income for the year.

Roth IRA withdrawals for a first-time home purchase can offer more favorable tax treatment. Contributions to a Roth IRA are made with after-tax dollars, meaning they can always be withdrawn tax-free and penalty-free. If the Roth IRA has met the five-year aging period, any earnings withdrawn for a qualified first-time home purchase are also entirely tax-free and penalty-free. The five-year period begins on January 1 of the tax year for which your first contribution to any Roth IRA was made. If the five-year rule has not been met, the earnings portion of the withdrawal may be subject to income tax, but the 10% early withdrawal penalty will still be waived.

Steps for Accessing and Using Funds

Initiating a withdrawal from your IRA for a first-time home purchase requires direct engagement with your IRA custodian. This could be a bank, brokerage firm, or other financial institution. Contact them to request the distribution, as they will have specific forms and procedures for penalty-free withdrawals. Many custodians require a statement or certification that the funds are intended for a qualified first-time home purchase to ensure proper reporting.

Once the funds are received, it is imperative to adhere strictly to the 120-day timeframe for using them towards qualified acquisition costs. This period begins on the day you receive the distribution. If the funds are not used for a qualified home purchase within this window, the entire withdrawal typically becomes fully taxable as ordinary income and subject to the standard 10% early withdrawal penalty, unless another exception applies. However, if the home purchase is delayed or cancelled, you generally have the option to recontribute the funds back into your IRA within the same 120-day period to avoid these taxes and penalties.

For tax reporting, your IRA custodian will issue IRS Form 1099-R, “Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.,” which reports the gross amount of your distribution. When filing your income tax return, use this Form 1099-R. You must also file IRS Form 5329 to claim the first-time homebuyer exception (using exception code 09) and avoid the 10% penalty. If you withdrew from a Roth IRA, you may also need to complete IRS Form 8606 to properly account for the distribution and track your contributions and earnings. Maintaining thorough records, including your closing documents, is important in case the IRS requires verification of the use of funds.