Do You Get Penalized for Taking Money Out of an IRA to Purchase a Home?

by Don Rafner

You're hunting for a home, but you're worried about the down payment and closing costs. You don't have enough money in savings to cover them. You do, though, have a significant amount of money in your traditional IRA. The good news is that you can withdraw dollars from your IRA to purchase a home without suffering any penalties. However, you'll have to follow certain rules.

Homebuyer Exemption

The federal government allows you to use up to $10,000 from your IRA to help buy your first home. If you're married and both you and your spouse are considered first-time home buyers, you'll be able to withdraw up to $20,000 from IRA funds without suffering an early withdrawal penalty.

First-Time Buyer

The government has a lax definition of what a first-time home buyer is. Technically, you don't have to be purchasing your first home. The government considers you a first-time buyer as long as you haven't owned a principal residence anytime in the last two years.

Time Limit

The home-buying exemption, though, does come with at least one string: You must use the money that you withdraw from your IRA within 120 days. If you don't use your withdrawal within that time period, you will be hit with the normal tax penalties associated with the early withdrawal of funds from an IRA.

Spending the Money

Under the IRS' first-time home buyer rules, you can use money from your IRA to pay for any of the costs associated with buying a home. This includes funds that you use for a down payment and closing and settlement costs.

About the Author

Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.

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