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Can you cash out your IRA to buy a home?

Need some extra cash for that down payment? You can use funds from your IRA to help out. See more pictures of retirement.
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These days, it can be hard enough to pay bills, much less save enough for a down payment on a house. The median price of a home today ranges from $138,900 to $242,500, depending on where you live [source: National Association of Realtors]. That means the typical 20 percent down payment would require as much as $30,000 to $50,000. Even so, you may want to buy that home sooner rather than later so that you can start paying yourself (your mortgage) instead of a landlord.

But can you use your Individual Retirement Account (IRA) money to buy a home? The answer is yes. You can, and in some cases you can do so penalty-free. If your employer and the plan permit, first-time buyers can take advantage of the hardship rule of early IRA withdrawal. If you qualify, you won't have to pay the early distribution tax that normally goes along with early withdrawal from an IRA.

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Let's look at some ways to qualify. First, make the home your primary residence. As long as you haven't owned a home for two years, and the employer and type of plan allow, you can qualify for this hardship exception and use money withdrawn from your IRA toward purchasing a home. Remember, the home you buy must be considered a primary residence. For example, you can't use the exception for buying a seasonal vacation home, such as a ski chalet or lake cabin.

You can, however, use it to buy a primary residence for yourself, and in some cases, you can buy residences for family members, too. The home can be for your spouse, your child or your grandchild, or it may be for your spouse's child or grandchild (in the case of remarriage). Sisters, brothers and their children aren't included in this exception.

Next, let's look at some other ways in which cashing out your IRA can help you buy a home.

 

So you just sold your principal home. Perhaps you sold it at a loss in order to get out of a large payment, or maybe you sold it to buy a bigger, better abode. In either case, you may not have enough money in savings toward the down payment on a new home, and you may want to use money from your IRA to help.

If you wait two years between owning homes, you can withdraw money from your IRA, and if the employer and plan allow, you won't be penalized by the early distribution tax. One thing that's important to remember is that if you're married, your spouse must not have owned a principal residence within two years, either.

Considering today's median home prices, you need to realize that the money from your IRA that qualifies for the hardship exception will probably not be enough for the entire down payment. There is a $10,000 lifetime limit on this exception. Once you withdraw $10,000 from your IRA toward a home purchase, you cannot use any other IRA funds for the rest of your life without incurring the penalty. However, if the time is right for you to buy a home, the $10,000 can be a big help.

Author, public speaker and financial advisor Kaye A. Thomas offers a couple of examples:

First, let's say your son needs $20,000 for the down payment on a new home. For this purpose, he'll take $10,000 from his IRA, and you'll take $10,000 from your IRA. Assuming neither you nor your son has taken a previous qualified first-time homebuyer distribution, both distributions will qualify, and he'll be able to offer the $20,000 down payment.

But what if both your son and daughter each need $10,000 for the down payments on new homes? For this purpose you take $20,000 from your IRA to split between them. However, only the first $10,000 will be a qualified first-time homebuyer distribution [source: Thomas].

The bottom line is that if it's the right time for you or your family member to purchase a first home, withdrawing some money from your IRA may be beneficial in the long run.

For lots more information on home buying and IRAs, check out the links on the next page.

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Sources

  • CUNA Mutual Group. "IRAs: Roth IRA early withdrawal rules." (Jan. 23, 2011)http://members.cunamutual.com/educationcenter/FinLibView.asp?ART_ID=13681&SITE=99999999
  • National Association of Realtors. "Existing-Home Sales Resume Uptrend with Stable Prices." Dec. 22, 2010. (Jan. 23, 2011)http://www.realtor.org/press_room/news_releases/2010/12/existing_prices
  • Pitt, David. "Fidelity: 401(k) Hardship Withdrawals, Loans Up." The Associated Press. Aug. 20, 2010. (Jan. 21, 2011)http://abcnews.go.com/Business/Savings/wireStory?id=11441792
  • Steiner, Sheyna. "Penalty-Free 401(k), IRA Withdrawals." Bankrate.com. March 10, 2010. (Jan. 21, 2011)http://www.foxbusiness.com/personal-finance/2010/03/10/penalty-free-k-ira-withdrawals#ixzz1BuGggAEt
  • Stephanic, Claire. "Is It Time to Cash Out?" The Motley Fool. Nov. 18, 2008. (Jan. 21, 2011)http://www.fool.com/personal-finance/retirement/2008/11/18/is-it-time-to-cash-out.aspx
  • Thomas, Kaye A. "First-Time Homebuyer." Tax Guide for Investors. Jan. 24, 2008. (Jan. 23, 2011)http://www.fairmark.com/rothira/first.htm
  • Wang, Jim. "Unlock Your IRA: How to Cash Out an IRA Without Penalty." Bargaineering. Aug. 18, 2009. (Jan. 19, 2011)http://www.bargaineering.com/articles/unlock-your-ira-how-to-cash-out-an-ira-without-penalty.html

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