Penalty-Free IRA Distributions for First-Home Purchase | Ed Slott and Company, LLC

Penalty-Free IRA Distributions for First-Home Purchase

By Sarah Brenner, JD
Director of Retirement Education
Follow Us on Twitter: 
@theslottreport


Despite the COVID-19 pandemic, or maybe even because of it, real estate markets in many areas of the country are busy right now. If you are considering jumping in, and if this is your first home purchase, coming up with a down payment can be daunting. Here is how an IRA can help a first-time homebuyer.


Exceptions to the 10% Penalty

IRAs are supposed to be for saving for retirement. If you tap your IRA before reaching age 59 ½, you run the risk of being hit with the 10% early distribution penalty. However, there are some exceptions to this penalty. Remember, even though an exception to the 10% penalty may apply to a distribution from a traditional IRA, the funds will usually still be fully taxable.


First Home Purchase Exception

If you take a distribution from your IRA and use the funds to acquire a first home, the 10% early distribution penalty does not apply. The exception to the 10% penalty applies only to IRAs (including SEP and SIMPLE IRAs). It does not apply to distributions from an employer retirement plan like a 401(k).

“Acquiring a home” can mean purchasing an existing home or constructing a new one. Closing costs, including reasonable settlement or financing costs, would qualify. The home that is acquired must be a principal residence. If you rent an apartment where you are currently living, and you are looking to purchase a vacation home, that would not qualify.

The definition of “first-time home buyer” for purposes of this exception may not be what you expect. A first-time home buyer is someone who has not owned a home for the past two years. If you owned a home, but you sold it five years ago, you would qualify. The first-time home buyer may be the IRA owner, but certain family members can qualify as well. A spouse, or a child, grandchild, parent or grandparent of the IRA owner or their spouse all qualify.

The funds must be used within 120 days from the date the distribution is received. There is a $10,000 lifetime limit per IRA owner. If an IRA owner takes a penalty-free distribution of $7,000 and gives it to an adult child for a first home purchase, that IRA owner has $3,000 left that they may use over their lifetime for a first home purchase.

There are some special rollover rules for distributions taken for a first home purchase. A client has 120 days, not the standard 60 days, to roll over these distributions if the purchase of the home is cancelled or delayed. Also, if the purchase is cancelled or delayed, the one-rollover-per-year rule does not apply.

So, if you are in the market as a first-time home buyer and need access to cash, know that up to $10,000 of your IRA assets could be available, penalty free.

 


Content Citation Guidelines

Below is the required verbiage that must be added to any re-branded piece from Ed Slott and Company, LLC or IRA Help, LLC. The verbiage must be used any time you take text from a piece and put it onto your own letterhead, within your newsletter, on your website, etc. Verbiage varies based on where you’re taking the content from.

Please be advised that prior to distributing re-branded content, you must send a proof to matt@irahelp.com for approval.

For white papers/other outflow pieces:
Copyright © [year of publication], [Ed Slott and Company, LLC or IRA Help, LLC - depending on what it says on the original piece] Reprinted with permission [Ed Slott and Company, LLC or IRA Help, LLC - depending on what it says on the original piece] takes no responsibility for the current accuracy of this information.

For charts:
Copyright © [year of publication], Ed Slott and Company, LLC Reprinted with permission Ed Slott and Company, LLC takes no responsibility for the current accuracy of this information.

For Slott Report articles:
Copyright © [year of article], Ed Slott and Company, LLC Reprinted from The Slott Report, [insert date of article], with permission. [Insert article URL] Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.

Please contact Matt Smith at matt@irahelp.com or (516) 536-8282 with any questions.

 

Find members of Ed Slott's Elite IRA Advisor GroupSM in your area.
We neither keep nor share your information entered on this form.
 

I agree to the terms and services:

You may review the terms and conditions here.