Using Your IRA to Buy Your First Home
By Joe Cicchinelli, IRA Technical Expert
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IRA distributions that you take before age 59 ½ are considered early distributions that are subject to an IRS 10% early distribution penalty unless an exception applies. For IRAs, there are many exceptions to the penalty including death, disability, higher education, and others. A lesser known exception to the penalty applies if you use IRA funds to buy your first house.
Early withdrawals from IRAs generally should be discouraged because they reverse the retirement savings process and are really costly. They are costly because they’re subject to both federal income taxes plus the 10% early withdrawal penalty, which combined, can erode a big part of your IRA distribution. But in the real world, you might want or need to access your IRA funds before your retire.
The 10% penalty won’t apply to your IRA distributions that you use to buy or build a principal residence if you are a first-time homebuyer. Not only can you use the money to buy the house, but you can also use the money to pay for settlement fees, closing costs, and financing fees.
You qualify as a first-time homebuyer if you haven’t owned a house in the past two years (and if you’re married, your spouse also cannot have owned a house in the past two years).
There’s a $10,000 lifetime limit on penalty-free distributions that you can use for a first-time home purchase, but this limit applies per IRA owner. So, if you and your spouse each have your own IRAs and qualify as first-time homebuyers, each of you can take $10,000 for a total of $20,000 for the same home purchase. If you take more than $10,000 from your IRA, the amount above won’t be exempt from the 10% penalty.