Penalty-Free IRA Withdrawals for Home-Buying Expenses

You may be able to use money in your IRA toward the cost of buying a home without incurring an early distribution penalty from your IRA. The withdrawal is subject to regular income tax, but you avoid the 10% early distribution penalty on withdrawals before age 59û.

You can only withdraw up to $10,000 free from penalty from your IRA. This is a once-in-a-lifetime opportunity. If you have already used this break to buy a previous home, you can’t use it again.

You must spend the $10,000 on qualified first-time home-buying expenses, such as a down payment to purchase a home. These are expenses used to buy, build, or rehabilitate a main home for yourself, your spouse, child, grandchild, or ancestor (parent or grandparent) of you or your spouse. Such person cannot have had an ownership interest in a principal residence within 2 years before the purchase, construction, or renovation of the new home.

Use this tax break only as a last resort. Once you withdraw the funds from the IRA and spend them on home-buying expenses, you cannot replace the funds in your retirement savings account. In effect, you lose the opportunity to build up your retirement savings.

If you take a withdrawal from your IRA with the intention of using the money to buy a home but the sale falls through, you become taxed on the money unless you redeposit it back in the IRA. You have 120 days from your initial withdrawal to take this action.

When a couple is buying a home together, each must be a first-time homebuyer for the penalty exception to apply.