IRA Withdrawal For A Home Purchase: What You Need To Know

Coming up with a down payment is often the biggest obstacle to buying a home for first-time home buyers. Because of this, it’s natural to look to other sources of funds, including your individual retirement account (IRA).

Using retirement funds to buy a house is an option, but is it the right option for you? Learning how and when you can make an IRA withdrawal for a home purchase can help you make that decision.

Can I Use My IRA To Buy A House?

IRA account holders do have the ability to withdraw money from their IRA to buy a house. However, they’ll need to meet certain qualifications if they want to avoid a penalty fee for withdrawing the funds used for the home purchase.

Early Withdrawal Penalty When Using IRA Funds

If you don’t meet the qualifications, you may have to pay a 10% early withdrawal penalty for removing funds from your individual retirement account. One of the penalty exemptions is if you’re a first-time home buyer taking out no more than $10,000. Whether the withdrawal is subject to regular income tax depends on the type of IRA you have.

Distributions or withdrawals from traditional IRAs are taxed when they’re taken. In contrast, you pay the taxes when you contribute to a Roth IRA, so this isn’t subject to income tax again upon withdrawal or distribution.

Penalty Exemptions

As previously stated, there’s a 10% tax penalty for an early withdrawal from an IRA, but you can make a penalty-free withdrawal before retirement age if you qualify for an exemption. Here are some of the most common exemptions.

First-Time Home Buyers

Qualified first-time buyers can withdraw up to $10,000 from their IRA penalty free to buy, build or rebuild a first home. You must close on the transaction within 120 days of receiving the funds. The IRS defines a first-time home buyer as someone who had no interest in a primary home for 2 years prior to the date of closing on the home. This requirement also includes your spouse.

Death Of The IRA Owner

In the event of an IRA owner’s passing before they take distributions, there are a couple of things that can happen depending on the way the IRA is set up. The IRA must be used by the 5th or 10th year after passing or over the expected lifetime of an eligible beneficiary. The rules can be different if the owner was already taking distributions. We recommend you speak with a tax preparer for more information.

59½ Years Old Or Older

At this point, you’re considered retirement eligible by the IRS and can withdraw from your IRA penalty free.

How To Withdraw From An IRA For A Home Purchase

We’ve shown it’s possible to do an IRA withdrawal for a home purchase, but there are a few factors to consider before moving forward.

1. Confirm That You’re Qualified

You can withdraw money from an IRA at any time. However, you might be required to pay an additional 10% tax penalty if you don’t qualify for an exemption. The exemption is necessary to make a penalty-free withdrawal. We’ve listed a few of the most common ones above, but the IRS has a full table of IRA withdrawal exemptions.

2. Understand Withdrawal Rules For A Traditional Vs. Roth IRA

Even if you don’t have to pay a penalty to withdraw funds from your IRA, you should be aware that your withdrawal may or may not be taxed as income. The important distinction is whether you have a traditional IRA or a Roth IRA.

When you have a traditional IRA, your contributions aren’t taxed going into the account. Instead, the income is taxable when you withdraw it or take a distribution. With a Roth IRA, it’s the reverse. The income is taxed when you put the money in, but there’s no tax when it’s taken out.

A financial advisor can help you determine which one is right for you. There are also income limits if you’re looking to open a Roth IRA. In 2024, you can’t make more than $161,000 as a single person or $240,000 if you file jointly.

3. Choose Your Withdrawal Amount

There is generally no limit to what you can withdraw from your IRA, but there are potential limitations and tax penalties. Although we won’t go very deep (because you should really talk to a tax advisor about your individual situation), many times, there may be waiting periods before you can withdraw from your retirement account.

Considerations To Make When Choosing Your Withdrawal Amount

Additionally, this is intended to be your retirement savings, so keep in mind that whatever you use now won’t be able to be used later. You might choose to make higher contributions to your funds to catch up, but you should also remember the IRS limits your annual contributions. Your total contribution to all your IRAs can’t be higher than the lesser of the following in 2024:

• $7,000 ($8,000 if you’re over 50 years old)
• Your taxable compensation for the year

If the penalty is your concern, you want to avoid withdrawing more than $10,000 for a down payment as a first-time home buyer. Speak with a financial or tax advisor about making a withdrawal for other purposes beyond the scope of this post.

Pros And Cons Of Making An IRA Withdrawal For A Home Purchase

There are both benefits and disadvantages to using an IRA withdrawal toward a home purchase.

Pros

• You’re able to buy a home: If you’re having trouble coming up with the necessary funds for a down payment, an IRA withdrawal could be the thing that helps make home ownership a reality.
• You can qualify for penalty-fee exemptions: If you meet IRS qualifications as a first-time home buyer and withdraw $10,000 or less, you can use the money toward a down payment if you close within 120 days. In this circumstance, there’s no 10% tax penalty, although the withdrawal itself may still be taxable income.

Cons

• Less money in retirement: If you withdraw money from your retirement account, you’ll have less money to use in retirement. With certain accounts, the earnings and interest are tax-free when distributed or withdrawn. If you take the money out, it’s less time for the funds invested in that account to be gaining investment earnings and interest, even if you later catch up and replenish the funds.
• Penalty fees: If you choose to withdraw more than $10,000 prior to age 59½, you’ll have to pay a 10% early withdrawal penalty in addition to any other income tax that you may be subject to as a result of the distribution.

FAQs About IRA Withdrawals For A Home Purchase

Now that we’ve touched on the ins and outs as well as the pros and cons, let’s answer a few questions.

Can I withdraw from my IRA as a first-time home buyer?

You can withdraw from your IRA at any time and for any purpose, but there may be tax penalties involved. There is a carveout if you’re a qualified first-time home buyer who hasn’t owned a home in the last 3 years prior to closing. You can withdraw up to $10,000 to buy or build your first home without a 10% tax penalty. The distribution may still be subject to regular income tax.

Can I use my Roth IRA to buy a house? 

It is possible to withdraw from your Roth IRA to buy a house. However, various penalties and exceptions may apply depending on factors like your age and home buying status, so it’s best to consult a tax expert to help you determine if using funds from a Roth IRA is your best option when buying a home. 

Is it a good idea to withdraw from my IRA for a house?

There are a couple of considerations to think about if you’re considering withdrawing from your retirement plan to fund a down payment. If you withdraw more than $10,000, there’s the tax penalty to worry about. Beyond that, withdrawing early from your IRA puts a dent in your retirement savings. Even when replaced, you’ve lost the potential financial earnings and interest that money would have garnered by just sitting in your retirement account during the intervening years.

How do I report an IRA withdrawal on my taxes?

Regardless of whether the IRA withdrawal is a qualified one, you’ll need to report any taxable income from the distribution on your 1040. If you have to pay a 10% tax penalty for a nonqualified distribution, you may need to fill out IRS Form 5329. Be sure to consult a tax advisor.

The Bottom Line: An IRA Withdrawal For A Home Purchase Is Possible

Although you can do an IRA withdrawal at any time, many of these involve a penalty if completed before age 59½. However, there is an exemption for withdrawals up to $10,000 for a home purchase as long as you’re a first-time home buyer. It’s important to note that depending on the type of IRA you have, the distribution may still count as taxable income.

In addition to the potential for penalties, when determining if this is the right strategy for you, take into account its effect on your future retirement savings. Consult a financial advisor before undertaking any particular investment strategy.

If you’re ready to move forward purchasing a home, you can start your mortgage application today. Our Home Loan Experts are also standing by at (833) 326-6018.