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 below.
- 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