Homeowners Q & A: My husband and I would like to help our son make a down payment on his first home, and we’re thinking of tapping our IRAs, but we’re not 59A1/2 yet, so we’re worried about incurring a penalty. What are the rules for withdrawing money from an IRA to buy a house?
The rules are different for traditional IRAs and Roth IRAs. With a Roth, you can withdraw contributions for any reason at any time without taxes or penalties. And you and your husband can each take up to $10,000 in earnings from your Roth IRAs for a first-time home purchase without a 10% early-withdrawal penalty. If you’ve had your Roths for at least a five-year period (five calendar years, counting the year you made the first contributions), the earnings are tax-free, too.
Or you could each withdraw up to $10,000 penalty-free from a traditional IRA. You’ll avoid the early-withdrawal penalty, but the money is taxable. That $10,000 for a first-time home purchase is the maximum you can take over your lifetime, whether from a traditional IRA, Roth or a combination of the two, and whether it’s for yourself or an eligible relative.
“You can take multiple withdrawals for a first-time home purchase as long as the total does not exceed the lifetime cap of $10,000 per person,” says Jeff Levine, director of retirement education for Ed Slott and Company, which provides IRA advice. The money must be used by yourself or your spouse, kids, grandchildren or parents. A “first-time” home buyer is defined as someone who hasn’t owned a home for the past two years. The money must be used to buy or build the home within 120 days of the withdrawal.
For more information about the rules, see IRS Publication 590-B, Distributions from Individual Retirement Arrangements.
One downside to either type of IRA withdrawal is that the money will no longer be there to grow tax-free (or tax-deferred) for your own retirement. Another option is to take a 401(k) loan, which allows you to access the money without removing it permanently from your retirement savings because you must pay it back.
You can generally borrow up to half of your 401(k) balance, up to a maximum of $50,000, for any reason without taxes or penalties. The interest you pay on the loan (typically the prime rate plus one or two percentage points) goes back into your account. Most loans from 401(k)s must 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 for yourself. However, you generally have just 60 or 90 days to repay the loan if you leave or lose your job; if you don’t repay the loan within that time and you’re not at least 55 by the end of the year you leave your job, the loan will be considered a withdrawal subject to taxes, and you’ll also have to pay a 10% early-withdrawal penalty.