Tapping an IRA for a Home Down Payment

What are the rules for withdrawing money from my IRA for a house down payment? Do I have to pay a penalty because I am under age 59½?

First-time home buyers of any age can withdraw up to $10,000 from a traditional IRA penalty-free for a home, and your spouse can also withdraw up to $10,000 from his or her IRA penalty-free 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 defined as someone 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.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

You can 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% 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 a five-year period (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. See Roth IRA Withdrawal Rules for more information about the special rules for withdrawing money from Roth accounts that had been converted from traditional IRAs.

If you have a 401(k), consider taking a loan from that account before tapping your IRAs for a down payment. You can generally borrow up to 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% early-withdrawal penalty if you aren't at least 55 by the end of the year you leave your job.