What are the rules for withdrawing money from my IRA for a down payment on a home? Will I pay a penalty because I am under age 591/2?
If you’re a first-time home buyer of any age, you can withdraw up to $10,000 from a traditional IRA penalty-free to pay for a home, and your spouse can also withdraw up to $10,000 from his or her IRA for the purchase. You’ll avoid the early-withdrawal penalty, but you’ll owe taxes on the money.
First-time home buyer has a broader definition than you might think. It’s anyone who hasn’t owned a home for the past two years. You can use the money to buy or build a first home for yourself or your spouse, kids, grandchildren or parents. The money must be used to buy or build the home within 120 days of the withdrawal.
You get a bigger break if you withdraw the money from a Roth IRA. You can withdraw Roth contributions tax-free and penalty-free at any time for any reason. After you withdraw your contributions, you can withdraw up to $10,000 in earnings for a first-time home purchase without a 10-percent early-withdrawal penalty. Whether that money will be taxed depends on how long you’ve owned the Roth. If you’ve had the account for five years (technically, five calendar years, counting the year you made the first contribution), the earnings are tax-free, too. Otherwise, the earnings are taxable, even though the penalty is waived. For more information, see IRS Publication 590, Individual Retirement Arrangements.
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If you have a 401(k), consider taking a loan from that account before tapping your IRA. You can generally borrow as much as half of your balance, up to a maximum of $50,000, for any reason without taxes or penalties. The interest you pay on the loan (generally the prime rate plus one or two percentage points) goes back into your account.
Loans from 401(k)s must generally be paid back within five years, but your employer may give you up to 15 years to repay a 401(k) loan to buy a home (whether you are considered to be a first-time home buyer or not). However, you generally have just 60 or 90 days to repay the loan if you leave or lose your job; otherwise, it will be considered a withdrawal and subject to taxes. Plus, you will have to pay a 10 percent early-withdrawal penalty if you aren’t at least 55 when you leave your job.
Kimberly Lankford is a contributing editor to Kiplinger’s Personal Finance magazine. Send your questions and comments to firstname.lastname@example.org. And for more on this and similar money topics, visit Kiplinger.com.