Can You Use Money From IRA to Buy a House?

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on June 06, 2024

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Advantages and Disadvantages in the Use of IRA Funds for Purchasing a House

Can You Use Money From an IRA to Buy a House?

Yes, you can use money from your IRA to buy a house, but the rules and implications vary between Traditional IRAs and Roth IRAs. With a Traditional IRA, you can withdraw up to $10,000 penalty-free for a first-time home purchase.

While you won't face the usual 10% early withdrawal penalty if you're under age 59½, you will still have to pay income tax on the withdrawal. For Roth IRAs, you can withdraw your contributions (not earnings) at any time without taxes or penalties.

Additionally, if your Roth IRA has been open for at least five years, you can withdraw up to $10,000 of earnings without penalties or taxes for a first-time home purchase.

In both cases, the IRS defines 'first-time homebuyer' quite broadly; you qualify if you haven't owned a home for the last two years.

The $10,000 is a lifetime limit, not an annual one, and you must use the funds within 120 days of withdrawal for eligible expenses related to the home purchase.

It's wise to consult with a financial advisor before making such a decision to ensure it aligns with your overall financial strategy.

Rules Surrounding the Use of IRA Funds for Purchasing a House

Traditional IRA

When it comes to traditional IRAs, any distribution taken out will be added to your taxable income for the year. The primary concern arises when funds are withdrawn before the age of 59½. Normally, an early withdrawal from a Traditional IRA incurs a 10% penalty.

Roth IRA

Roth IRAs, on the other hand, offer a bit more flexibility. Since contributions to a Roth IRA are made with after-tax dollars, qualified distributions are tax-free.

To be considered "qualified", the Roth IRA must be at least five years old, and the owner must be 59½ or older, disabled, or using the funds for a qualified first-time home purchase.

For non-qualified distributions, while the contributed amount can be withdrawn tax-free, earnings may be subject to taxes and penalties.

Rules Surrounding the Use of IRA Funds for Purchasing a House

IRA Withdrawal Rules for First-Time Homebuyers

First-time Homebuyer in the Context of IRAs

The IRS defines a first-time homebuyer as someone who hasn't owned a home in the past two years. This definition is broader than one might assume, allowing individuals who've owned homes in the distant past to benefit.

Limits and Amounts

There's a $ 10,000 lifetime limit for penalty-free withdrawals for home-purchasing purposes from an IRA. If married, both spouses can each pull from their IRAs, potentially summing up to $20,000 for a house down payment or associated costs.

Usage of Funds

The withdrawn funds aren't restricted solely to the direct purchasing of the house. They can also be used for closing costs or even repairs and renovations on a newly acquired property.

However, to qualify for the penalty-free provision, the funds must be used within 120 days of withdrawal.

IRA Withdrawal Rules for First-Time Homebuyers

Advantages and Disadvantages in the Use of IRA Funds for Purchasing a House

Advantages

One significant advantage is the ability to facilitate homeownership, especially in a market where property prices may be rising rapidly.

By leveraging tax-advantaged funds, first-time homebuyers can potentially enter the real estate market sooner. Owning a home is also a form of investment, with the potential for property appreciation over time.

Disadvantages

While the prospect of homeownership is tempting, the act of depleting retirement savings can't be ignored. Using these funds now might mean less money during retirement.

Moreover, the potential tax implications and penalties for non-qualified withdrawals can take a chunk out of your savings.

There's also the loss of potential growth and compound interest to consider; the funds you withdraw won't be there to grow and compound over the years leading to retirement.

Advantages and Disadvantages in the Use of IRA Funds for Purchasing a House

Alternatives to Using IRA Money for a House Purchase

401(k) Loan

While similar in many ways to an IRA, a 401(k) offers a distinct feature: the ability to take out a loan against your account balance. This loan can be used for any purpose, including buying a house, and doesn't incur the tax penalties associated with early IRA withdrawals.

Personal Loans or Mortgages

Exploring traditional financing options can often be more beneficial in the long run. Personal loans or mortgages, although accompanied by interest, don't jeopardize retirement savings. Plus, they come with their own set of tax benefits, like mortgage interest deductions.

Gifts and Family Support

If feasible, receiving financial assistance from a family can be another way to source funds for a home purchase. However, both parties should be aware of gift tax implications, ensuring that any monetary transfers are compliant with IRS guidelines.

Alternatives to Using IRA Money for a House Purchase

Key Considerations Before Using IRA Funds

Assess Financial Health

Dipping into your retirement fund is a significant decision. It's essential to have an emergency fund in place and to evaluate how this decision aligns with long-term retirement goals. Ensure that you're not sacrificing future financial stability for present gains.

Consultation With Financial Advisors

Decisions regarding large financial assets should never be made in isolation. Engage with a financial advisor to discuss potential ramifications, strategies, and alternatives. They'll provide a holistic view of your financial situation, helping you make informed decisions.

Understand the Real Estate Market

The real estate market can be unpredictable. If you're thinking about using your IRA funds for a home, it's crucial to understand the current market conditions, future projections, and whether you're looking at a short-term residence or a long-term investment.

Conclusion

Using money from an IRA to buy a house offers potential benefits, especially for first-time homebuyers, but it's crucial to understand the attached rules and implications.

Traditional IRAs allow a penalty-free withdrawal of up to $10,000 for this purpose, though tax implications still apply. Roth IRAs provide more flexibility, with tax-free qualified distributions.

Both IRAs define a first-time homebuyer as someone without homeownership in the past two years, and the $10,000 is a lifetime cap. Funds must be used within 120 days on eligible housing-related expenses.

While this option can provide immediate financial relief, it might compromise long-term retirement goals. Given the complexities, it's recommended to consult a financial advisor and thoroughly assess personal financial health before leveraging IRA funds for homeownership.

Can You Use Money From IRA to Buy a House? FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

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