If you’re ready to buy your first home but don’t quite have a down payment saved up, you may be able to tap into your traditional IRA for down payment funds. Right now is a great time to buy a house, which means it may just be worth it to pull some of your retirement money in to buy a home sooner rather than later.
Typically, you can’t withdraw money from a traditional IRA before you turn 59½ without paying a hefty 10 percent penalty. But the 1997 Taxpayer Relief Act changed some of the IRA rules to allow IRA owners to withdraw money early, penalty-free, in certain circumstances.
One of those circumstances includes buying, building or rebuilding your first home. So if you want to buy a house, and you qualify as a first-time homeowner and have money in an IRA, you may just have your down payment waiting for you already.
Who counts as a first-time homebuyer? As with all things IRS-related, the rules surrounding this IRA early withdrawal exception get a little complicated. You can actually qualify as a first-time home buyer even if you’ve owned a home before.
Note that to the IRS, the “date of acquisition” for your new home isn’t the closing date. It’s the date that you sign a binding contract to buy the home, or the date that the building or rebuilding of the home begins.
Also note that you can take money out of your IRA account for homebuyers other than yourself. IRA distributions can be used to cover home buying/building expenses for your spouse, child or grandchild, or your spouse’s child or grandchild.
What can you use the money for? Under this exception, IRA owners can withdraw up to $10,000 total over a lifetime for “qualified acquisition costs” on a home. These costs include the cost of buying, building or rebuilding a home, as well as most settlement, financing and closing costs.
So whether you’re buying a home as-is or building/rebuilding a new home, you can use up to $10,000 of your IRA money without paying that pesky 10 percent penalty.
You may still owe something. Even though this exception allows you to skip out on the 10 percent penalty for your IRA withdrawals, you’ll still have to pay income taxes on the money you take as a distribution from your traditional IRA. Remember, money you’ve contributed to a traditional IRA hasn’t been hit with income taxes yet, and you always have to pay those taxes eventually when you take a distribution.
Depending on your financial situation, a $10,000 withdrawal could have some serious tax implications. It’s probably a good idea to talk to a tax professional before making this withdrawal, just to be sure you can handle any taxes you need to pay on the distribution.
Timing is essential. You have 120 days to apply your IRA distribution to your qualified home buying expenses before it becomes a non-qualified distribution. This means if you take the withdrawal and your home purchase falls through, you could get stuck paying that 10 percent penalty on your withdrawal, which is now non-qualified.
To avoid this, wait until the last possible moment before withdrawing your IRA funds. That way, you won’t unexpectedly get stuck with an IRA withdrawal and no home to spend it on.
So before you decide to withdraw from your IRA for your down payment, you may want to talk to a financial advisor about the potential ramifications of this decision.
This original article can be found at http://money.usnews.com/money/blogs/my-money/2013/10/28/using-your-ira-for-a-downpayment.