One of the biggest investments you can make is buying a home. Another is investing in your individual retirement account, or IRA. Although tapping your IRA to buy a home isn't always the right choice, it is an option to explore and may work for you given your personal situation.
The Internal Revenue Service (IRS) allows you to pull money out of an IRA to fund the purchase, building or rebuilding of a home. However, the IRS restricts how much you can take out without penalty if you are age 59 1/2 or younger. You can use IRA money to buy a home only if you are a first-time home buyer, meaning you held no interest in a principal residence -- for example, a mobile home -- in the first two years before the purchase of your home. If you want to withdraw more than the allowed amount or already have a home, you still can, but you may have to pay penalties.
An IRA is designed to provide for your needs during retirement. One of your most basic needs is shelter. By using your IRA to purchase a house, you are able to meet this need. The IRS also recognizes the price of a home may be better before you reach full retirement age than after you retire. It thus supports your ability to take advantage of a good market.
The IRS allows you to take up to $10,000 as an early distribution -- a distribution taken before age 59 1/2 -- from your IRA for first-time home purchase. Penalties normally would apply to early withdrawals, but for first-time home buyers, the IRS waives the 10 percent penalty applied to all early traditional IRA withdrawals and to withdrawals against earnings for Roth IRAs. If you've taken out money previously for home purchase, the sum of your previous distributions and the new one cannot exceed the $10,000 limit. However, if you're married, both you and your spouse can take out up to $10,000 for a combined total of $20,000. The money must go to qualified acquisition costs. The home must be for you, your spouse, children, grandchildren, parent or other close relative.
Should You Do It?
On one hand, taking money out of your IRA early for a home makes sense given you need a place to live when you retire. However, you'll still need to pay income tax on the withdrawal if it comes from a traditional IRA or earnings on a Roth IRA you've had less than five years. Tax rates can vary over time. Some people would be hard pressed to pay the tax on such a large distribution. Additionally, when you buy a home, you acquire debt, with some mortgages lasting 30 years. If you are not prepared to handle that debt along with continuing contributions to the IRA, it might not be in your best long-term financial interest to take the distribution. This of course depends on the value of the home and the potential return you could get from sale in the future housing market.
- Sold Home For Sale Sign & New House image by Andy Dean from Fotolia.com