Can I Use My IRA to Buy a House? A Complete Guide

It’s a big deal to buy your first home, but it can be hard to save up for the down payment, especially if you’re young and just starting out in your career. If you have money saved in an IRA, you may be wondering if you can use that money to help you buy a home. The short answer is yes, there are times when you can take money out of an IRA to buy a house. But there are some important things you should think about before taking money out of your retirement savings.

In this comprehensive guide, we’ll cover everything you need to know about using IRA funds to purchase real estate.

IRA Home Purchase Rules and Requirements

The IRS allows penalty-free IRA withdrawals up to $10,000 for first-time homebuyers This applies to both traditional and Roth IRAs Some key requirements

• You can’t have owned a home in the last two years and this is your first one. If you’re married, your spouse must also meet this duty.

• The $10,000 lifetime limit applies individually. So if you and your spouse both have IRAs, you could each withdraw up to $10,000 for a total of $20,000.

• You can only use the money to buy, build, or rebuild your main home. You have 120 days to complete the purchase.

• The exemption can also be used to help your child, grandchild, or parent purchase their first home.

Tax Implications of IRA Home Purchase Withdrawals

While you avoid the 10% early withdrawal penalty, IRA withdrawals are still subject to income taxes. This is a key difference between traditional and Roth IRAs:

• Traditional IRAs: You’ll owe ordinary income tax on the full $10,000 since contributions were made pre-tax.

• Roth IRAs: Qualified distributions are tax-free. To be qualified, the Roth account must be at least 5 years old. If not, taxes apply only to the earnings portion of the withdrawal.

Make sure you talk to a tax expert to fully understand what this means for your specific situation. Proper planning can help minimize surprises at tax time.

The Pros and Cons of Using IRA Funds to Buy a House

Before withdrawing your retirement savings, weigh the pros and cons:

Pros

• Access $10,000 (or $20,000 for married couples) without the 10% early withdrawal penalty.

• The funds can help you buy a home sooner if you don’t have enough savings yet.

• IRA withdrawals don’t impact your credit score or debt-to-income ratio like a mortgage or loan would.

Cons

• Once you hit the $10,000 limit, you can never use the exemption again, even for a different home.

• You lose out on potential future earnings from the money withdrawn.

• There may still be tax consequences, reducing the actual withdrawal amount available to you.

• You deplete retirement savings that may be needed later in life.

As you can see, there are advantages and disadvantages to consider when weighing an IRA withdrawal versus other options.

Alternatives to Tapping Your IRA for a Down Payment

If you decide preserving your retirement funds takes priority, here are some alternatives to generate cash for a home purchase:

• Down payment assistance programs – Many state and local programs provide grants or low-interest loans to help first-time buyers.

• Gifts from family – Asking parents or grandparents to contribute can be a huge help.

• Lower down payments – Many mortgages require less than 20% down, making the upfront cash needed lower.

• Save aggressively – Open a high-yield savings account and contribute regularly to ramp up your down payment fund faster.

• 401(k) loan – You may be able to borrow up to $50,000 from your 401(k) and repay it over 5 years.

• Cash-out mortgage refinance – If you already own a home, tap equity to use for your next home’s down payment.

Don’t rush into an IRA withdrawal without thoroughly exploring all your options. A few years of disciplined saving could position you to buy just as fast or faster.

Tips for Using an IRA to Purchase a Home

If you’ve weighed the trade-offs and decide to proceed with an IRA withdrawal, follow these tips:

• Verify you or your spouse meet the first-time homebuyer definition. Review IRS rules in detail.

• Calculate taxes owed so you know the net amount you’ll actually have available.

• Consult a financial advisor or tax professional to maximize benefits and avoid penalties.

• Notify your IRA custodian of your intent to withdraw under the first-time homebuyer exemption.

• Strictly limit the withdrawal to only the funds you need right now.

• Be ready to document how the funds were used if the IRS inquires. Keep all related receipts.

• If buying jointly, consider which spouse should make the withdrawal based on income and tax bracket.

• Move quickly to close on the home purchase within 120 days of withdrawing the funds.

With the right planning, an IRA can be a helpful source of funds to get you into your first home a bit sooner. But make sure you understand the rules thoroughly and weigh the pros and cons. As with any major financial decision, do your homework before you proceed.