Can I Withdraw From My Roth IRA to Buy a House?
Understand the key distinctions between withdrawing contributions and earnings from your Roth IRA to properly fund a home purchase without incurring penalties.
A Roth Individual Retirement Arrangement (IRA) is a retirement account featuring tax-free growth and withdrawals in retirement. Contributions are made on a post-tax basis, meaning you pay taxes on the money before it goes into the account, providing a source of tax-free income later in life. This article explains the rules and procedures for using a Roth IRA to buy a house.
General Roth IRA Withdrawal Rules
To use a Roth IRA for a home purchase, you must understand how withdrawals are structured. The money is divided into two categories: direct contributions and investment earnings. Direct contributions are funds you personally deposit, while earnings are profits from investments.
The Internal Revenue Service (IRS) has an ordering rule for distributions. Funds taken from your Roth IRA are always considered your direct contributions first. You can withdraw contributions at any time, for any reason, without taxes or penalties, as you already paid income tax on them.
Only after withdrawing an amount equal to your total contributions do you access investment earnings. Withdrawals from earnings are subject to ordinary income tax and a 10% early withdrawal penalty if you are under age 59½. Specific exceptions, like the one for first-time homebuyers, can help avoid these costs.
The First-Time Homebuyer Exception
The tax code allows individuals to use Roth IRA earnings for home acquisition costs via a special exception. This permits a penalty-free withdrawal of up to $10,000 in earnings, which is a lifetime limit per person. If married, you and your spouse can each withdraw up to $10,000 from your respective IRAs for a combined $20,000 toward the same home.
Two conditions must be met to use this exception for earnings. First, the Roth IRA must have been open for at least five years, a requirement known as the “5-year rule.” This period begins on January 1 of the tax year of your first contribution. If this holding period is not met, the withdrawn earnings are subject to income tax, though the 10% penalty is still waived.
Second, you must qualify as a “first-time homebuyer.” The IRS defines this as someone without an ownership interest in a principal residence during the two-year period ending on the new home’s acquisition date. Even if you have owned a home before, you can qualify by meeting this two-year requirement. The funds can be used for your own purchase or for that of a spouse, child, grandchild, parent, or ancestor.
Tax Reporting for the Withdrawal
You must report a distribution for a home purchase to the IRS. Your financial institution sends you and the IRS a Form 1099-R, which details the gross distribution amount and includes a distribution code in Box 7. For a first-time homebuyer distribution before age 59½, the code is “J.”
While Form 1099-R reports the withdrawal, you must show the IRS that it qualifies for an exception using Form 8606, Nondeductible IRAs. In Part III, you will detail the distributions from your Roth IRA. You must report the total withdrawal and specify the portion used for the home purchase, up to the $10,000 limit.
Completing Form 8606 correctly reconciles the amount on Form 1099-R with your tax liability. The form separates your tax-free contributions from taxable earnings. This documentation shows the IRS that the earnings portion of your withdrawal, up to the lifetime cap, is not subject to the 10% early withdrawal penalty.
The Withdrawal and Purchase Timeline
The process begins by requesting a distribution from the financial institution holding your Roth IRA. You must specify the amount and may need to state the reason for the withdrawal. The institution will then process your request and issue the funds.
The IRS requires that the funds be used for qualified acquisition costs within 120 days of the distribution date. These costs can include the down payment, settlement, financing, or closing costs for buying, building, or rebuilding a home. Keeping detailed records of how the money was spent is important for documentation.
If a home sale is delayed or falls through, the IRS provides a way to avoid taxes and penalties. You have 120 days from the distribution date to roll the money back into an IRA. This is an exception to the standard 60-day rollover rule. Returning the funds within this window treats the distribution as a tax-free rollover.