IRA Withdrawal Rules for a Home Purchase

By Bill Herrfeldt

  • Overview

    Making a withdrawal from your IRA prior to reaching 59½ years old generally triggers payment of tax on the amount representing appreciation AND a 10 percent penalty. Strangely enough, however, due to the Taypayer Relief Act of 1997, you can make withdrawals if it will help you become a homeowner. By doing so, you will avoid the 10 percent penalty, although you will be obligated to pay tax on the accumulated appreciation of your withdrawal.
  • Significance

    This is a tremendous benefit to a person who wishes to own his own home because he can withdraw up to $10,000 for that purpose. But the government works in strange ways. Instead of simply encouraging first-time buyers into the real estate market, the act states that this privilege extends to people who haven't owned a home for 24 months. That means that not only first-time buyers can withdraw funds from an IRA without penalty, but also those who haven't owned a house recently.
  • Features

    The ability to withdraw funds without penalty from an IRA prior to reaching 59½ years old extends to others beside the owner of the IRA. The law states that the privilege extends to "the owner's spouse, or any of his children, grandchildren or ancestors."

  • Size

    Once one exercises his right to withdraw $10,000 penalty-free from his IRA for a home purchase, he cannot do it again. However, it is possible for both a mother and father to withdraw $10,000 from their respective IRAs, penalty-free, to help one of their children purchase a house. Before doing so, consult with your tax accountant for clarification of this rule.
  • Time Frame

    Generally, a person using funds withdrawn from an IRA to apply towards the purchase of a house has 120 days to distribute those funds, so timing of the withdrawal is important. Also, these funds must be use for cost associated with the purchase of the house, not other expenses such as maintenance, repairs or the purchase of furniture.
  • Warning

    Let's say you find out about this exclusion after you have purchased your new home. Unfortunately, paying the mortgage down now with $10,000 withdrawn from an IRA is not considered a "qualified acquisition expense." Thus, it would be necessary to pay both the tax on the accumulated appreciation as well as the 10 percent penalty for early withdrawal. Also, don't make the common mistake of believing that these rules are for every type of retirement plan--they are meant for IRAs only.
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