How To Buy A House Using Your IRA

The IRS has made provisions to ensure that people are not aggrieved to find their IRA account has impacted their liquidity to that extent that they are not able to manage the purchase of their dream home. As per the rules of the IRS, funds from the IRA can be withdrawn in case of some exceptional circumstances. These exceptional cases that warrant a premature withdrawal include paying for education fees, paying for medical bills and also payment towards the purchase of your home.

With regard to the provision that allow premature withdrawal from your IRA there are various rules that you need to keep in mind. The rules vary depending upon the type of IRA in which you are invested. A traditional IRA is governed by a set of different rules than a Roth IRA.

Traditional IRA

If you hold your investments in a Traditional IRA, according the rules of IRS, you are entitled to use the money for the purchase of your home, without incurring any penalties on the withdrawn amount, but this is subject to the condition that you are a first time home buyer

Who is a first time home buyer?

The IRS allows you to withdraw a maximum amount of $10,000 from your IRA funds toward the purchase of your first home. In the event that you are married, and you and your spouse are both first-time buyers, then each of you can withdraw funds from your retirement accounts, thus allowing you upto $20,000 in cash for the purchase of your first abode.

According the IRS, a first-time homebuyer is anybody who has not held a principal residence under his name in the last two years. For a couple, even if it is the wife or the husband who does not own a home in the last two years, he or she would qualify to withdraw from her or his IRA. There is also a provision to share your IRA wealth with your near and dear ones. The IRS definition of first-time homebuyer that is entitled to use your IRA funds for a down payment can be either you, your spouse, one of your children, a grandchild or a parent.

Plan your IRA withdrawal

Remember that once you withdraw funds from your IRA for the purchase of your home, you need to use the IRA funds within 120 days of withdrawal to pay qualified acquisition costs.

Roth IRA

Like Traditional IRA, investors in Roth IRA can withdraw funds from a Roth IRA for funding the purchase of their first home. Besides being a first time home buyer the other conditions that need to be met are that your Roth IRA account should have been opened for five years. Like a traditional IRA, you can withdraw only upto $10,000

The $10,000 limit is a lifetime limit so you can’t withdraw $5,000 twice in two different home situations. If the rules are met then the withdrawal will count as a qualified distribution and you will avoid paying income tax and early withdrawal fees.

In case you are not a first time home buyer, you can still withdraw funds from your Roth IRA upto $10,000. But in this scenario, you can withdraw tax free the amount only to the extent of your contributions. The earnings or profits that you have accumulated on your contributions have to stay in the IRA.