| Can I use my IRA to buy a house without penalty?Yes, you can withdraw up to $10,000 without penalty if you qualify for early withdrawal exceptions. |
First-time home buyer exception: The key rule to know
Surprisingly, the IRS definition of a “first-time home buyer” doesn’t limit you to one home. Instead, the government uses a two-year lookback rule. If you (and your spouse) haven’t owned a primary home in the last two years, you are officially seen as first-time home buyers under IRS rules. All this is great news if you have been renting for a while and are ready to re-enter the market to buy your primary residence.Here’s exactly how the IRA withdrawal rules work for this exception:- Who qualifies: You are considered a first-time buyer if you haven’t owned a principal home during the two-year period ending on the date you buy your new home.
- The limit: You can withdraw up to $10,000 in your lifetime. If you’re married, your spouse can also withdraw up to $10,000 from their separate IRA for a total of $20,000.
- The timeline: You must use the funds to pay for qualified acquisition costs within 120 days of the withdrawal.
- The taxes: You still owe regular income taxes on any pretax money you withdraw from a traditional IRA.
| Tip: Watch out for automatic withholding. When you try to withdraw your funds, many IRA custodians will default to withholding 10% of the money for federal taxes. If you’re counting on the full $10,000 to cover your closing costs, this can leave you with less cash than expected. |
Withdrawal differences between traditional and Roth IRAs
You can borrow from your Roth IRA to buy a house, because both traditional and Roth IRAs have provisions for penalty-free early withdrawals. But there are differences in how these withdrawals are treated in terms of taxes and eligibility. Here’s a breakdown of the main differences between Roth IRA and traditional IRA withdrawal rules:- With traditional IRAs, first-time home buyers can take out up to $10,000 without paying the 10% penalty, but they still have to pay taxes on the money.
- With Roth IRAs, the same penalty-free rules apply. But this IRA might be more flexible because you can take out the money you contributed at any time without paying taxes or a penalty.
| Tip: Consider whether you need to own 100% of a home to enjoy it. Co-ownership with Pacaso can reduce upfront costs and ongoing expenses, helping you buy without dipping into retirement savings if using an IRA feels like a stretch. |
How to use an IRA to buy a house
1. Check the IRS qualifications
Before you move a cent, you need to verify that you meet the IRS withdrawal exceptions for a penalty-free withdrawal. If you miss even one of these by a single day or dollar, you could trigger the 10% penalty plus a tax bill:
- Age: You are age 59 ½ or older.
- Status: You haven’t owned a primary home in the last two years.
- Timing: You’ll use the funds for qualified acquisition costs within 120 days.
| Tip: If your purchase is canceled or delayed, you must roll that money back into your IRA within 120 days of the withdrawal. |
2. Choose your retirement account
After you’re sure you qualify for penalty-free withdrawals, it’s time to choose which account to take funds from. With various retirement account options, it’s important to note the key differences between your early withdrawal options:- Traditional IRA: This IRA is potentially a good option for first-time home buyers or those who haven’t owned a home in the last two years.
- Roth IRA: A Roth IRA is another option first-time home buyers should consider. Remember that withdrawing from this account could result in a loss of interest and potential gains from long-term growth.
- Self-directed IRA: Unlike traditional and Roth IRAs, a self-directed IRA can be a more flexible way to purchase real estate. If you want to buy a second home to generate rental income, for example, then you can purchase a property with a self-directed IRA — as long as the home isn’t for personal use.
- 401(k): You can withdraw from your 401(k) to buy a home by applying for a loan of up to $50,000 or the hardship withdrawal exemption. Consider using this account if you do not qualify for penalty-free early IRA withdrawals.
| Tip: Just because you can tap into your retirement savings doesn’t always mean you should. Pulling money out of the market now interrupts the compounding growth that helps your savings grow over time. If the market is down, you’re also locking in those losses for the long term. |
3. Confirm your withdrawal amount
You might be wondering how much cash you can actually pull from your IRA. The technical answer is that you can withdraw any amount. However, the smart answer is strictly capped at $10,000 per person for the penalty-free exception. If you're purchasing a second home, you’ll likely face the 10% penalty on the full withdrawal amount unless you’re over age 59 ½.Pros and cons of using an IRA for a home purchase
- Penalty-free access: You can tap into your savings without the 10% early withdrawal fee if you follow the rules.
- Long-term savings: While you’re taking some cash out now, the rest of your IRA stays invested, continuing to grow and compound for your future.
- The “Re-entry” Ticket: It’s a perfect tool for those who haven’t owned a home in the last two years to get back into the market.
- Tax implications: Remember, unless it’s a Roth, you will still owe income tax on every dollar you withdraw, which can lead to a larger-than-expected bill in April.
- Lack of compounding: Money withdrawn from your IRA stops growing, meaning you miss out on the compounding returns that help build wealth over time.
- Nest egg risk: If you drain too much now, you might find yourself short on funds when you actually retire.
- Complexity: Trying to get fancy with a Self-Directed IRA can expose you to high fees and strict IRS “prohibited transaction” rules that can disqualify your entire account.
Alternatives to withdrawing from your IRA
If touching your retirement savings feels too risky, you have other options. Several loan programs can help you buy a home with little to no money down, leaving your retirement savings intact.- 401(k) Loans: Instead of a taxable withdrawal, you can borrow from your own 401(k) and pay the interest back to yourself.
- FHA Loans: These government-backed loans feature down payments as low as 3.5% if you qualify.
- VA Loans: If you are a veteran or active-duty service member, you might qualify for a zero-down payment option.
- Conventional Options: Even standard mortgages now offer programs with down payments as low as 3% for first-time buyers.
Is using an IRA to buy a house the right move for you?
Now that you know the answer to “can I borrow from my IRA to buy a house?” is yes, the next step is deciding if it aligns with your long-term goals. We recommend weighing all the factors to consider when buying your home before you sign any paperwork. If the math works out, browse our PacasoNow listings to find the perfect spot to start making memories.IRA withdrawal for home purchase FAQ
01: Can you use retirement funds to buy a house?
Yes, you can use retirement funds to buy a house. If you would like to avoid paying an early withdrawal penalty, you must qualify for exemptions.
02: How do I report an IRA withdrawal on my taxes?
To report an IRA withdrawal, submit Form 1099-R when filing your taxes.
03: Can I use my IRA as a down payment on a house?
Yes, you can use your IRA as a down payment on a house. However, you may be subject to a $10,000 withdrawal limit, so keep that in mind while securing funding for your down payment.
04: At what age is IRA withdrawal penalty-free?
In most cases, you must be 59½ years old or older to qualify for free withdrawals from your IRA.
05: Can both spouses withdraw from IRAs for the same home purchase?
Yes. If you are married and both you and your spouse have eligible IRAs, you can effectively double your buying power.
