If you’re ready to buy your first home but don’t quite have a down payment saved up, you may be able to tap into your traditional IRA for down payment funds.
Typically, you can’t withdraw money from a traditional IRA before you turn 59½ without paying a hefty 10 percent penalty. But the 1997 Taxpayer Relief Act changed some of the IRA rules to allow IRA owners to withdraw money early, penalty-free, in certain circumstances.
One of those circumstances includes buying, building or rebuilding your first home. So if you want to buy a house, and you qualify as a first-time homeowner and have money in an IRA, you may just have your down payment waiting for you already.
Who counts as a first-time home buyer? As with all things IRS-related, the rules surrounding this IRA early withdrawal exception get a little complicated. You can actually qualify as a first-time home buyer even if you’ve owned a home before.
The IRS rule says that as long as you haven’t had financial interest in a home in the past two years before the date you’re closing on your new home, you’re technically a first-time home buyer. So if you sold your last home on March 1, 2015, and haven’t owned a home since then, you could use the funds in your IRA to put a down payment on a home that you sign a contract for any time after March 1, 2017.
You can put up to $10,000 of IRA funds toward the purchase of your first home. If you’re married, and you and your spouse are first-time buyers, you each can pull from retirement accounts, giving you $20,000 in residential cash. Note that to the IRS, the “date of acquisition” for your new home isn’t the closing date. It’s the date that you sign a binding contract to buy the home, or the date that the building or rebuilding of the home begins.
As with any major financial investment, a wise strategy starts with an in-depth discussion with not only a real estate specialist – but with your financial advis0r.