Buy a Home With IRA Money

Buying a home is expensive and is one of the largest financial investments most people make in a lifetime. Saving enough money to make a down payment can take years. Because of this, some people choose to finance the purchase with their retirement plan. However, taking loans from your retirement plans or withdrawing money from your Individual Retirement Account (IRA) should be done as a last resort unless you meet certain requirements that will spare you from penalties and fees.

Steps

Buying a Home With a Traditional IRA

1. Determine if you qualify as a first-time homebuyer. First-time homebuyers can use $10,000 of their Traditional IRA funds towards the purchase of a new home, without incurring a 10% penalty for taking the money before the age of 59 ½. The IRS defines a first-time homebuyer as someone who has not owned a primary residence during the past two years.
   • Even if you owned a home more than 2 years ago, you will still qualify as a first-time homebuyer.
   • Owning a cottage or recreational property does not impact your status as a first-time homebuyer.
2. See if your spouse qualifies as a first-time homebuyer. If legally married and buying the property together, you and your spouse may each withdraw $10,000 from your Traditional IRAs without penalty. The $10,000 per-person limit is a lifetime limit, so you can't withdraw $5,000 twice in two different home situations.
   • You can also qualify for the $10,000 exemption if you're helping your spouse, child, grandchild or parent buy a home.
3. Prepare to pay taxes on your IRA withdrawal. You will need to pay federal and state taxes on the money you take from your Traditional IRA, as it will be considered income by the Internal Revenue Service. This may significantly lessen the total amount available to purchase a house.
   • For example, if you are in the 25 percent tax bracket, your $10,000 withdrawal will translate into only $7,500.
4. Purchase or begin constructing your new home within 120 days of your Traditional IRA withdrawal. Failing to meet this deadline means that you will have to pay a penalty to the IRS. Remember to retain a dated copy of the purchase or construction contract, and copies of the documents you sign.
   • The penalty paid to the IRS in this case is 10% on withdrawn money. In addition, the withdrawal is taxed at the same rate as your regular income.
   • In addition to a downpayment, your IRA money can be used for other acquisition costs, including building or repairs to the house, closing costs and financing fees.

Buying a Home With a Roth IRA

1. Verify how long your Roth IRA has been open. If open for at least 5 years, you will avoid taxes on any earnings withdrawn. However, you can withdraw contributions at any time without paying taxes or penalties. Contributions are the funds you deposit into a Roth IRA, while earnings are the funds gained from investments or interest.
2. Determine whether you want to use earnings or contributions (or both) to buy a home. There is no restriction on how much of your contributions (funds deposited into to a Roth IRA) can be withdrawn without paying taxes or penalties. However, any earnings (funds gained through interest or investments) you withdraw are subject to a $10,000 limit, and will be penalized unless are a first-time home buyer (as defined above).
   • You might want to withdraw Roth IRA contributions to avoid restrictions. But in some cases it is better to withdraw earnings under the first-time home buyer exemption. That way your contributions can continue to generate interest.
   • If you exceed the $10,000 limit on earnings withdrawals, you have to pay income tax on the amount over $10,000. However, you are not charged an additional 10% fee by the IRS.
3. Withdraw Roth IRA money to help pay for your new house. If you only withdraw from your contributions, there is no need to buy your home within 120 days. However, this time-restriction still applies if you draw on earnings.
   • Remember that a Roth IRA is only available to people whose annual income is below a certain level ($116,000 for an individual in 2015).
   • If you believe that your income will grow above this level over time, it may be wise to use your Roth IRA to buy a home sooner than later.

Tips

• Try to time the purchase of your home for early in the year. The more interest you pay on your mortgage throughout the year, the more you can deduct on your taxes for that year. Because you may be taxed on your IRA withdrawal, getting the highest mortgage interest deduction you can will help offset that distribution.
• Work with a qualified financial planner or tax specialist before taking money out of your retirement plan, or making a large purchase, such as a home.
• This article is intended to serve as a basic guide only. Always consult with a financial professional before making a large purchase like a home.

Warnings

• If your home purchase falls through, be sure to roll the IRA money back into a retirement fund within 120 days, or you will face taxes and penalties.
• Consider the risks of putting too much of your IRA into real estate.What would happen, for example, if you suddenly had major healthcare expenses and the majority of your retirement funds were tied up in a house?

Related Articles

• Withdraw from a SIMPLE IRA
• Raise Money for a New Home
• Buy Your First Home With Bad Credit
• Buy a Home With No Money Down
• Buy a Second Home

Sources and Citations

See also

• Buy Property in a Retirement Community
• Save Money when Buying Your First Home
• Determine Land Value
• Buy a House with Bad Credit
• Buy Your First Home With Bad Credit
• Prevent Identity Theft
• Read a Land Survey
• Buy an Apartment Complex
• Get a Quit Claim Deed
• Get Started in Real Estate Investing

Read more ...

What links here

• Buy a House