Can You Take an IRA Withdrawal to Pay for a Home?
- Mar. 3, 2023
- Ailin Goode
- Home Loans
The short answer to this question is yes, you can take an IRA withdrawal to pay for a home. However, doing so will require you to meet certain conditions to do so without paying a penalty. If you qualify as a first-time homebuyer, the IRS allows you to withdraw money from your Individual Retirement Account (IRA) to put toward your new house. If you’ve never owned a home or you haven’t owned one for the last two years, you qualify.
Investing in a home and saving the money you've earned for retirement are both long-term plans to help you secure your future so it can be smart to tap into one to acquire the other. Using your IRA to purchase a residence is possible and easy if you understand how it can affect you in the short term and long term. Be realistic about where you are financially and how consistently you can save and contribute to your retirement plans.
There are different rules, advantages, and drawbacks depending on which type of IRA you have. Whether you are a first-time homebuyer or a seasoned one, there are many factors to consider before taking money out of your IRA to buy a house.
Just because you can, doesn’t mean you should, but if you have your heart set on dipping into your IRA, we’re here to help you understand the process better. It’s important to do your own research but it’s also wise to talk with a financial advisor. They can evaluate your personal situation, help you calculate and manage potential risks, and assist you in finding a plan that works best for your individual goals.
Check out our tips and tricks for first-time homebuyers.
How to Use an IRA to Buy a Home
Investing in an IRA helps secure your financial future once you retire. It’s not advised to raid your nest egg to solve present money issues. Keep in mind there are homebuying loans to assist you in the present, but there are no retirement loans to save you in the future.
If you feel confident you want to utilize your IRA for buying a home, we can help you make sense of the process. The IRS allows you as a first-time homebuyer to withdraw $10,000 from your IRA to purchase, build, or rebuild a home. Any amount over $10,000 is subject to a 10% penalty.
Depending on which type of IRA you have, you may or may not have to pay income tax on it. You can use this withdrawal for a house for yourself or certain family members who also qualify as first-time homebuyers such as a spouse, child, or grandchild.
It should also be noted that if you and your spouse both have an IRA and you both qualify as first-time homebuyers, you can each withdraw $10,000 without penalty. That would give you a total of $20,000 to put toward the same home purchase. This can be separate IRA's or, if your spouse is unemployed, you may still qualify for a Spousal IRA.
Traditional IRA vs. Roth IRA
Both traditional and Roth IRAs make an early withdrawal exception for first-time homebuyers under the age of 59 and with a lifetime limit of $10,000. The difference between a traditional and Roth IRA are tax treatments and a requirement about how long you’ve had the Roth IRA.
A traditional IRA isn't taxable right now. The income is taxed later. It is funded with pre-tax or tax-deductible dollars. Later, after you retire from being employed and begin taking money out of the account, you will pay regular income tax on your withdrawals. Ideally, you do not want to withdraw from your IRA until you’ve reached the age of 59 because you’re subject to a penalty tax if you take it out early. However, the IRS makes situational exceptions and one of those is being a first-time homebuyer.
With a Roth IRA, the income is taxable now, not later. The money you contribute to this account gets taxed before it goes in, so you don’t have to worry about paying any additional taxes when it’s time to withdraw. There is a time requirement to accessing your Roth account to buy a home: you need to have had the account for at least five years to withdraw money tax-free and without a penalty.
Pros and Cons of Using Your IRA to Pay for a Home
If you’re still far out from retirement age, this option can make a lot of sense for you. The IRS allows you to withdraw up to $10,000 from your IRA without having to pay a penalty tax if you qualify as a first-time homebuyer. Qualifying for this is easy and having extra cash to put down on your forever home is always a good thing.
Having $10,000 (or $20,000 if you’re married and both have IRAs) to put down will help you qualify for a loan and lower your monthly mortgage payments. You can also use your IRA withdrawal to help a family member buy their first home. This money can also help you pay a higher down payment which can help you avoid paying mortgage insurance.
As people continue to live longer, it’s important to properly fund your future. Money in your IRA compounds over time, so if you take this money out before you retire, you’re removing funds that would likely grow. It’s important to plan properly and make sure you’re not jeopardizing your future financial security. You also need to use the funds no later than 120 days after withdrawal, which can become a problem if you encounter delays in the home-buying process.
For answers to your questions about the homebuying process, contact New American Funding today. Our loan officers will be happy to provide you with information and guidance. You can also explore our resources for education and online tools like our mortgage calculator to help figure out your mortgage needs.
How do I prove the IRA withdrawal is for a home purchase?
You don't need to provide proof to the financial institution managing your IRA that you're using the money for a home purchase. However, there are specialized forms you or your accountant will need to file with the IRS, such as Form 5329. This shows the IRS that your funds were allocated to the home buying or rebuilding purpose stated upon withdrawal.
How many times can you take funds out of your IRA in a year?
Technically, as many times as you want, but remember the age limit. If you withdraw before the age of 59, you will have to pay hefty penalties and taxes each time you take your money out. The more withdrawals you make, the more you bear the weight of taxes. There are a few exceptions, such as for first-time homebuyers, that limit you to only $10,000 penalty-free. Choose wisely when withdrawing from your IRA.
Should I use my 401(k) instead of my IRA to buy a home?
You can choose to withdraw from your 401(k), but you are subject to early withdrawal penalties and additional taxes if you do not meet the IRS exemptions specific to that retirement account.
Key Takeaways About IRAs and Buying a Home
We understand that when buying a home, coming up with a hefty down payment is one of the biggest challenges. Although you can easily turn to a traditional or Roth IRA to finance the purchase, it’s important to understand how doing so may negatively affect your retirement goals. Everyone’s financial situation is different, and each family has their own idea of what retirement will look like for them.
You need to ask yourself if $10,000 or $20,000 will benefit you more now to invest in a home or later down the road in retirement. Make sure you have enough information to understand the short-term and long-term financial ramifications of withdrawing from your IRA. It’s wise to consider all options carefully and consult with a financial advisor and tax professionals before deciding how you want your money distributed.