Using IRA Money for a Real Estate Purchase

If you’re considering purchasing real estate, coming up with enough money for the down payment can be a challenge. Use the considerations below if you have retirement money in an IRA that you’re considering for your home purchase.

If you’re looking to buy a house thinking that you’re going to use retirement account money to pay for the down payment you should consult with a financial adviser and/or your tax specialist before looking for a home. While there are general rules, the specifics of your situation are best handled by someone with whom you have a professional relationship.

In general, you will always want to avoid using IRA money that is subject to penalty, 10 percent on top of other fees or taxes that you owe.

If you have a Roth IRA that is funded with after-tax dollars, you only pay taxes on earnings. If you are using money you’ve put into the account and no amount of the money is from earnings, is likely you will pay no taxes on the money you withdraw and no penalty. If you’re using money from earnings on your Roth IRA other rules will apply including dollar amount limits and penalty provisions similar to those of traditional IRAs.

If you’re using funds from a traditional IRA for a down payment, your first concern is whether you qualify as a “first-time buyer.” A first-time buyer is anyone who has not been a homeowner in the past two years prior to the current purchase.

If you qualify as a first-time buyer and you have a traditional IRA, it’s likely you can take out up to $10,000 penalty-free. You will have to make your purchase within 120 days of the time you withdraw your money so don’t take the money out of your account prematurely.

If you end up with leftover money after your down payment you can legitimately use the money you removed from your traditional IRA for closing costs and expenses.

If you’re purchasing a home with a spouse or significant other, make sure that they also qualify to take out funds from their IRA without penalty as “first-time” buyers so that you don’t mistakenly believe you can get more money from your IRA for a real estate purchase than you really can obtain.

It’s very important that you consider the taxes you’ll owe on your withdrawal from a traditional IRA even if you qualify as a “first-time” home buyer. In calculating the taxes you’ll owe, be certain to consult with a tax adviser because the IRA administrator is not in a position to determine or withhold all the taxes you’ll owe on the money you take out. Tax liability can significantly reduce the amount of money you’ll have left to use towards your down payment.

Accumulating the money for a real estate purchase is difficult so that you’ll want to consider possible sources of money for your down payment. Use the criteria above if you’re considering taking money out of an IRA account to come up with the money you need for your down payment.

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