First-Time Home buyers, IRA Withdrawals, and Penalties

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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!

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  1. I would not recommend taking money out early from retirement accounts. You will be surprised how difficult it is to pay back.

  2. I agree. Just the hassle factor of paying it back would deter me. However to some it sounds like a good “loan” idea if they dont have any money to put down on a home.

  3. If possible, can you discuss other options such as Home Equity Line of Credit VS Home Equity Loan.

    Like possibly, a interest rate comparison chart of banks (similar to the one you have for savings)

    Interesting post…

  4. Well, with the growing popularity of Roth 401ks, maybe it’ll be somewhat easier to “pay back”, depending on the situation. But if this encourages people to contribute to their Roth IRAs, that would be good.

  5. 10K doesn’t really help much either, quite frankly. At least w/ a 401K loan you’re ‘funding yourself’

  6. How quickly do you anticipate replacing the money in your retirement account, and will you still be maxing out your contributions during this time?

  7. Especially if you are going to be priced out of a Roth IRA soon – what after tax retirement money will you have? Roth 401(k) perhaps. What if the IRS starts taxing at some ridiculous number when you retire? All your retirement savings will be in pre-tax accounts?.

  8. Nagel, AmDollar: My understanding is that IRA withdrawals are NOT loans and dont have to be paid back (and cannot be paid back even if you want to). I do agree with the general sentiment of not using retirement money for things other than retirement (incl. buying a home). However, if you have limited income currently to contribute to an IRA and save for a home, and are reluctant to lock up a portion of your savings in an IRA, the first time home buyer provisions would come in handy.

  9. I was going to say pretty much what KS just said. That’s why I put “pay back” in parentheses. I personally don’t have any plans to use this provision, but that doesn’t mean I don’t think anyone shouldn’t, ever. Sometimes people have to make some hard decisions with their money. It’s good to know your options.

  10. Most of these are bad ideas. Robbing Peter to pay Paul is not the best financial management strategy.

    Problem with taking out Roth IRA money – you lose that tax free growth forever.

    Problem with taking a loan against your 401(k) – you lose the earnings, and if you quit your job / are fired / layed off the money becomes due Immediately. Callable loans are the worst kind – its why it used to be a good idea to pay down your mortgage because you could literally lose the farm if conditions changed and the bank called the loan…

    By all means people should be maxing out their Roth IRA and 401(k) before saving any money for a house or for kids college expenses. They should be told that they can take money out of retirement for those purposes, so it is a great place to put money (as opposed to in a taxable account). But, taking money out of the retirement funds should be a last resort, not part of a good “financial plan”.

  11. So if you take the money out to buy the house, can you repay the money back to the IRA (beyond the normal annual contribution, that is)?

  12. No, these are not loans. See KS’s comment above. The only way you can “pay back” these distributions is to increase your contributions at a later time, maybe through a 401k or Roth 401k.

  13. Many 401(k) plans do allow the participant to take a loan from the 401(k) to use towards a down payment. Roth IRAs do not. Both Roth IRA and 401(k) plans allow a disbursement to use for a down payment.

    Borrowing from your 401(k) is generally preferable to taking a disbursement since you can put the money back into your 401(k). But again, you are losing out on the earnings and face the possibility of that 401(k) loan getting called (termination of employment). If the loan is called it is not tied towards your house – only towards your 401(k), so if you default, the money that you borrowed is treated as a disbursement (subject to penalties and taxes).


  14. The only reason you should be doing it is if taking the money out will be preventing a mortgage; i.e. paying cash for a home. Then a 10% one time beats the crap out of 8% over 30 years. It’s equity invested fully into real estate.

    Otherwise, 10k isn’t going to get you far. It’s almost a mandatory non-conforming mortgage if that’s what you’re doing, and we all know what that did to the market…

  15. Very clearly said. I was previously confused on the earnings and on whether the EARNINGS had to be in your Roth IRA for 5 years or your account had to be opened for 5 years. You made it clear for me now.

    I just hope this stuff still applies two years later :).

  16. investment says

    I am 27 and have over 30,000 in my 401k and 10000 in my traditional IRA. When saving this money it was always my intention to use it for a first-time home. Should I use the 10000 for a down payment? Why or why not?

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