The IRS allows first-time home buyers to take money out of IRAs before age 59½ without penalty. Although I don’t like the idea of taking money out of retirement accounts in order to pay for a house, I still would like to know what my options are. You know, just in case. Here’s a generalized summary of what I found.
What counts as a first-time home buyer? You may be surprised to know that it just means you haven’t owned a house in the previous two years. It has to be used to buy a person’s principal residence, but you could simply be a relative of that person and still qualify.
Traditional IRA Withdrawals
As a first-time home buyer, you can take out $10,000 from a Traditional IRA without the usual 10% early withdrawal penalty. It doesn’t matter if it is contributions or earnings. You’ll still have to pay any applicable income taxes, though.
Roth IRA Withdrawals
When you take money out of a Roth, the IRS has a pre-set order of what it is taken out.
1) First out are your annual contributions (non-rollover):
- No penalty, no taxes. These can be taken out of Roths at any time, for any reason.
2) Next are your rollover contributions, if any:
- This gets a little complicated due to taxable and non-taxable rollover contributions. But for most cases, you’ve already paid the taxes once, so there is no penalty and no taxes for first-time home buyers.
3) Finally, we have your earnings:
- If it has been 5 years since first opening your Roth IRA, then there is no penalty and no taxes for first-time home buyers
- If it hasn’t been 5 years, then there is no penalty, but you must pay taxes.
There is a lifetime limit of withdrawing $10,000 per person under these first-time home buyer conditions. For example, it could be $10,000 from you and $10,000 from your partner. Or a mother and father could pull out $20,000 for their kids. Note that this is on top of annual Roth IRA contributions which can be taken out for any reason.
For our situation, I know that we could take $18,000 from our Roth IRA annual contributions, but I can’t remember when I first started my Roth IRA. It was either 2001 or 2002.
As with most things tax-related, doing a perfectly correct article covering every possible scenario would take about 10 times the space I spent here. My goal was just to give a quick intro and hit the major points. For all the details, see IRS Publication 590 as well as this Fairmark series on IRA distributions. I just spent a couple of hours digging around in there – fun fun fun!