8 Essential Steps for Tapping Into Your IRA To Buy Your First House

Coming up with funds for a down payment is often one of the biggest challenges for first-time homebuyers. Whether you’re going to put down 10% or 20%, it’s a significant chunk of change.

If you are desperate for down-payment cash, you might have the option of drawing money out of your IRA a little early.

Want to learn more about this potentially savvy money move for homeowners? Here are the steps to using IRA money to buy your first house.

If you’re a first-time homebuyer, the IRS is on your side. It permits an individual who is a first-time buyer to withdraw up to $10,000 from a traditional IRA without paying an early withdrawal penalty.

Married couples can take $20,000 — $10,000 each — from their accounts.

The IRS says a first-time homebuyer is someone who hasn’t owned a home at any point in the past two years. That means you could be a “first-time homebuyer” more than once during your lifetime.

However, the ability to withdraw $10,000 from your IRA is a lifetime limit. That means that if you have exercised this option in the past, you cannot do so again.

When you decide to leverage using your IRA funds as a first-time homebuyer, make sure you have a plan in place.

These funds must be used within 120 days of withdrawing them, and they must be used when you purchase the property. They cannot be used for renovations or on an existing mortgage. The funds must be in place on the day the contract is signed.

Penalties and taxes are not the same. If you withdraw funds from a traditional IRA as a first-time homebuyer, you won’t owe penalties, but you will pay taxes on the $10,000 that you withdraw.

The amount you owe will vary and will depend on your overall income.

One option to avoid taxes altogether is to skip taking money from a traditional IRA and instead withdraw some of the principal you have contributed to a Roth IRA. You can withdraw the contributions you made to a Roth IRA tax-free and without penalty at any time.

However, the earnings in a Roth cannot be taken penalty-free unless you are at least age 59.5 and five years have passed since you made your first contribution to a Roth account.

Tapping into your 401(k) is an alternative to withdrawing funds from your IRA, and it gives you more wiggle room in the amount you can borrow.

You can borrow up to $50,000 or 50% of your 401(k), whichever is less. You will not owe taxes or penalties on any of that money, but you will have to pay the money back over time.

You will also pay interest on the amount that you borrowed. This is paid back to your account. Also, note that if you leave your job or are laid off, you will need to pay back the entire amount over a short period or face a 10% penalty if you’re under 59.5 years old.

As with many things related to the IRS, using this penalty-free money can be complicated.

So, if you need help navigating the qualifications and stipulations around how the money is withdrawn and used, it’s a good idea to meet with a knowledgeable financial advisor. They can help guide you through the process.

Borrowing from your retirement savings isn’t necessarily the best way to get cash for a down payment. Your savings account should often be the first stop, and you can also consider withdrawing funds from other sources of savings.

Also, consider taking a part-time job or developing a side hustle so you can earn extra income that you can apply to a down payment.

If you have spent years trying to build wealth by contributing to an IRA, it’s possible that you might have the option of dipping into those funds to help pay for your first house.

Just remember that by taking money from your IRA, you potentially put long-term retirement savings in jeopardy. For that reason, you might want to look at other options for scraping together the money you need to make a down payment on a house.