First-time homebuyers can withdraw up to $10,000 from their IRAs to purchase a home without penalty. A spouse may be able to withdraw an additional $10,000 for a total of $20,000. “First-time homebuyers” are homebuyers who have not owned a home for at least two years.

If you have a traditional IRA, you will probably have to pay income tax on this withdrawal, but you will avoid the 10% penalty that normally applies to early distributions. If you have a Roth IRA, and you have held the IRA for at least five years, there is no income tax or penalties to pay. If held fewer than five years, you may have to pay tax on some of the distribution, but you can avoid the early distribution penalty. Note: The withdrawal must be used within 120 days.

Low interest rates together with low home prices create great opportunities for homebuyers. It has been forty years since homes have been this affordable! The following is an illustration of utilizing funds in an IRA account toward a new home purchase.

Using IRA Account Funds toward a Down Payment

A first-time homebuyer couple decides to purchase a condo for $300,000 in downtown, San Diego using a $20,000 penalty-free withdrawal from their IRA for down payment and closing costs. Assuming they qualify for FHA financing, the typical down payment is 3½ percent, or $10,500. Generally, closing costs are 3% of purchase price, which amounts to $9,000. Combining down payment and closing costs, this couple needs a grand total of $19,500 to move forward on their home purchase. Can they do it? YES!

Getting Started in Real Estate

In downtown, San Diego, $300,000 will buy a one, or two bedroom condo up to approximately 1000 square feet. In this geographical market, where monthly rentals are equal to monthly mortgages, it makes sense to own.

If you are a first time homebuyer, please call us with any questions (619) 246-8400.

Tax information provided by Mary Kate Anderson, CPA, marykateandersoncpa.com.  It is advisable to consult a tax professional to determine how the above rules may specifically affect you.