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Your IRA as a Source for Down Payments?


illustration IRA and cash

Your IRA for a Down Payment?

There is an alternative source for down payments if you are a first-time home buyer! Keep this in mind if you fall into this category...

Most taxpayers know that they will pay a 10% penalty if they withdraw funds from their IRA before they turn 59.5 years old. There is an exception for first-time home buyers that allows a penalty-free withdrawal of up to $10,000 per person if they havent owned a home in the previous two years. This would allow a married couple who each have an IRA to withdraw a lifetime maximum of $10,000 each, penalty-free for a home purchase. Yes, penalty free! In many cases, the money would be used for a down payment or closing costs. An additional added benefit - by increasing their down payment, some buyers will qualify for a loan without mortgage insurance.Of course you should always "read the fine print": If the taxpayer qualifies for the penalty-free withdrawal, there may still be taxes due. Contributions to traditional IRAs are made with before-tax dollars and therefor tax must be paid when the funds are withdrawn. The exception is for owners of a Roth IRA, made with after-tax dollars, where there is no tax due when the funds are withdrawn. Another notable fact - the taxpayer making the withdrawal can help a qualified relative which includes children, grandchildren, parents and grandparents. Whether you are the withdrawing taxpayer, or you're lucky enough to have a relative withdrawing on your behalf, this is additional good news! Homebuyers who are considering using IRA funds for a home purchase should get expert advice from their tax professional concerning their individual situation. The variables of every situation make for a unique set of circumstances. For more info, check out this article from US News & World Report online: Using Your IRA for a Down Payment. Or this article from Using An IRA to Make a House Down Payment.

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