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Tapping IRAs for First Time Home Purchase

E-mail|Link Posted by Cheryl Costa October 23, 2009 10:03 AM

With the first time home buyers credit set to expire shortly, we are seeing more questions about how to tap Individual Retirement Accounts (IRAs) to help make a downpayment. Here is a quick review of the rules:

You (and also your spouse if you are married) can take a withdrawal of up to $10,000 from your IRA to buy or build a house and there won't be any penalty assessed on the withdrawal (typically, a 10 percent early withdrawal penalty would be imposed on distributions if you are under age 59 1/2). The money must be used for a first time home purchase. For the sake of avoiding penalties on the withdrawal, the person withdrawing the money must not have owned a home in the past two years. In addition, the money must be used to buy the home within 120 days of the withdrawal. Be careful to meet the 120 deadline and be sure that you qualify as a "first time homebuyer". If you miss either the deadline or don't meet the definition of first time homebuyer, you will owe a penalty on the withdrawal. Also, when you file your tax return for 2009, be sure to include Form 5329. While no penalty will be imposed on withdrawals from a traditional IRA, you will still owe taxes.

Finally, if you are considering taking a withdrawal from a Roth IRA to help pay for a new home, be aware that you can always take out the contributions that you have made to the Roth and no taxes or penalties will be owed. It is only once you starting withdrawing earnings that you run into complications.

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Local finance professionals share insights and advice on issues such as budgeting, managing debt, and retirement planning.

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About the contributors

Jill Boynton is co-founder of Cornerstone Financial Planning in Newington, N.H. Along with traditional financial planning services, Boynton provides analysis specifically for divorce.

Andrew Chan is the founder of Integrative Financial Advisors in Framingham. He provides comprehensive financial planning advice and investment management services. He has been an adviser for over 12 years and works with clients to integrate all aspects of their finances including investments, retirement, education funding, and tax planning.

Cheryl Costa is a managing director at AFW Wealth Advisors, which has offices in Natick and Purchase, N.Y. She advises clients on investing, education funding, and estate planning. She holds a master�s in business administration from Boston University.

Jamie Downey has been an accountant for more than 14 years. He's a partner at Downey & Co. in Braintree. Prior to joining the firm, he served as a manager in the audit department of accounting firm KPMG.