Using Your IRA Money for a Home Down Payment

Jeff HammerbergA traditional IRA does in fact allow you to withdraw up to $10,000 in order to finance a deposit for a first-time home purchase. Although it allows you to do this without paying an early withdrawal penalty (a standard 10% is usual) you may still have to pay income tax on the $10,000 withdrawal.

There are a lot of things to consider when attempting using IRA money for a home purchase down payment.

If you wish to avoid paying income tax on an IRA early withdrawal on a first-time home purchase you do have several options, there are certain qualifiers that allow you to withdraw $10,000 from a traditional IRA;

The first qualifier is based on age, you must be below 59 years old, and if you are below this age you are required to qualify for the next part. The second qualifier that you must pass if you wish to avoid paying taxes on your withdrawal = you cannot have owned a house for at least 2 years, and that you are only withdrawing a maximum of $10,000.

In order to qualify for a tax exempt withdrawal from your IRA you must pass the above qualifiers as well as passing the following requirements; you must ensure that the house you are buying is going to be your primary residence (no second homes or income properties). Another requirement is that the purchase of the home must be done within a set time limit. With this kind of withdrawal you have a maximum of 120 days to purchase the home, failure to do so will result in the money being returned to the IRA and that will be your life time limit used up until you hit the threshold again.

Careful consideration must be made when trying this because if the sale of the house falls through it leaves you vulnerable to legal issues.

With a traditional IRA you can only withdraw $10,000 in the lifetime of the IRA. The $10,000 limit means that once you have withdrawn this amount you cannot withdraw any more for other expenses that go along with purchasing a house until you have reached the IRA threshold. So it is important that before attempting to use IRA money for a down payment on a home you make sure that you are able to afford all of the other expenses that accumulate when purchasing property.

If you are withdrawing the IRA money for your child or your partner to buy their first home it is possible to do so without paying tax on the withdrawal as long as the above qualifiers and requirements are followed. When using your IRA money to help your loved one purchase their first home there is a time limit that you can take advantage of that often helps avoid the money being taxed. There is a 60 day payback clause that means that if you manage to get either a portion or all of the withdrawn money back into the account within 60 days the amount of cash put back in will not be considered a distribution and will not be taxable.

With a traditional IRA you should be aware that there are disadvantages to withdrawing money that goes beyond tax. The biggest disadvantage is that if you tap into your IRA money it is no longer there for you to use on other things such as other investments that could be more lucrative than a first time home. It could also cause you problems by pushing you into a higher tax bracket.

Using money from an IRA can be quite complicated, so we always recommend that above and beyond anything you may have learned here, you seek the advice of a qualified CPA who can look at your own personal circumstances and can advise how best to proceed.

Author Jeff Hammerberg is the Founding CEO of http://www.GayRealEstate.com. Free Instant Access to the Nation’s Top Gay, Lesbian and Gay Friendly Realtors Coast to Coast. FREE Buyers Representation ~ Free Relocation Kit to any City, USA ~ Free Sellers Market Analysis for home sellers.

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