Can I Take Money Out of My IRA to Buy a House?

An Individual Retirement Arrangement (IRA) is a long-term, tax-advantaged savings account designed for retirement. These accounts offer tax benefits, such as tax-deferred growth for traditional IRAs or tax-free withdrawals for Roth IRAs. Specific provisions allow access to these funds under certain conditions before retirement.

Understanding Standard IRA Withdrawals

IRA rules incentivize long-term savings. Funds are generally accessed once the account holder reaches age 59½. Withdrawals at or after this age are qualified distributions and can be taken without an additional penalty.

Withdrawals before age 59½ are subject to a 10% additional tax, known as an early withdrawal penalty. This penalty applies in addition to any regular income tax due. Specific exceptions allow penalty-free access to funds under certain circumstances.

The First-Time Homebuyer Exception

The first-time homebuyer exception allows penalty-free access to IRA funds for qualified home acquisition costs. Individuals can withdraw up to $10,000 from their IRA without the 10% additional tax. This $10,000 limit is a lifetime cap per individual.

An individual is a “first-time homebuyer” if they have not owned a main home during the two-year period ending on the new home’s acquisition date. If married, both spouses must meet this requirement. Funds must be used for qualified acquisition costs, including buying, building, or rebuilding a home, and settlement, financing, and closing costs.

The withdrawn amount must be used within 120 days of receiving the distribution. If not used within 120 days, the withdrawal may become subject to the 10% early withdrawal penalty. Funds can be recontributed to an IRA within 120 days to avoid penalty and taxation. The exception can be utilized by the account holder, their spouse, child, grandchild, or parent for their first home purchase.

Tax Implications and IRA Types

Tax implications of an IRA withdrawal for a first-time home purchase vary by IRA type. The first-time homebuyer exception waives the 10% early withdrawal penalty, but does not exempt the distribution from income tax.

For a Traditional IRA, contributions are made with pre-tax dollars. Withdrawals, even those qualifying for the first-time homebuyer exception, are subject to ordinary income tax. The amount withdrawn is added to the taxpayer’s gross income and taxed at their marginal rate.

Roth IRAs are funded with after-tax contributions. Qualified distributions from a Roth IRA are tax-free and penalty-free. For a first-time home purchase, a Roth IRA distribution is qualified if the account has been open for at least five years, and the withdrawal does not exceed the $10,000 lifetime limit for earnings.

Roth IRA distributions follow specific ordering rules: contributions are withdrawn first, then converted amounts, and finally earnings. Roth IRA contributions can always be withdrawn tax-free and penalty-free. To withdraw earnings tax-free and penalty-free for a first home, both the five-year rule and the $10,000 limit on earnings must be met.

Documenting and Reporting the Withdrawal

Documenting and reporting an IRA withdrawal for a first-time home purchase to the IRS is necessary. The IRA custodian will issue Form 1099-R, “Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.,” to the account holder. This form details the gross distribution amount.

When filing a tax return, the taxpayer must report the penalty-exempt withdrawal. This is done on IRS Form 8606, “Nondeductible IRAs.” On Form 8606, specific codes indicate an early distribution qualified for an exception.

Taxpayers must maintain thorough records to substantiate that the withdrawal met the first-time homebuyer exception requirements. Documents to keep include settlement statements, purchase agreements, and other records demonstrating qualified acquisition costs and timely use of funds. These records are important if the IRS has questions or conducts an audit.