Can IRA Withdrawal Be Used To Buy Home?

Added November 13, 2007 by Ilyce R. Glink

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Summary: An IRA is a retirement account that typically allow people to put money in and receive a tax benefit on their federal income taxes for their contributions. At age 59 1/2, you can withdraw money from your IRA but must pay income taxes on it. In some cases, you can withdraw money from your IRA to buy a home.

Q: I will be 60 years old soon. Can I withdraw money from my IRA account to help my daughter pay for her first home without paying any taxes on the withdrawal?

A: Let's start by talking about some of the rules regarding individual retirement accounts (IRAs). An IRA account is a retirement account, also known as an individual retirement arrangement. Most people put money into IRAs yearly or when they have cash to save for their retirement. Many IRAs allow people that put money into an IRA to receive a tax benefit on their federal income taxes for their contributions. These contributions reduce your annual income in the year you make the contribution, lowering the federal income tax you pay in that year.

In exchange for that tax benefit, the federal government penalizes you if you withdraw money from the IRA before you reach the age of 59 1/2. The penalty is usually 10 percent of the amount taken out, but can be as high as 25 percent.

However, at age 59 1/2, you are entitled to take money out of an IRA without paying the 10 percent early withdrawal penalty. But, you'd still have to pay income taxes on the money that you withdraw from the IRA.

Even if you were younger than the 59 1/2 threshold, you can withdraw cash to buy a first home. (If you haven't owned a home in the two years prior to a withdrawal, you/re considered a first-time buyer and will not owe a penalty on your withdrawal.)

Although you/d be able to take out the cash penalty-free, you'd still have to pay income taxes on the money you withdraw out of the IRA, which cannot exceed $10,000.

The IRA withdrawal rules also allow parents to help their children and ancestors buy a first home. Parents can withdraw up to $10,000 to help their immediate family members buy a first home.

There are other requirements you have to follow to make sure you don't inadvertently trigger the penalty. The IRS publishes an informational booklet (Publication 590) that explains these rules and the various requirements.

The good news is that you can help your daughter with money from your IRA. Because the withdrawal isn't tied to her home purchase, and you're not 59 1/2 years of age or younger, you're not limited to $10,000.

Just be prepared to pay federal income taxes on whatever amount you withdraw.

Read the update on using IRA funds to buy a home and avoiding penalties.

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