Increasing Your House Down Payment with an IRA Withdrawal

Looking to buy a house and need a little extra umph to your down payment? Borrowing from your IRA may be one way to jolt your savings in time to buy that house you're looking into. Usually when you borrow from your IRA, an early withdrawal penalty and taxes are incurred, but to buy a house the IRS allows you to withdraw it with no early withdrawal penalty (you're still responsible for the taxes, however) up to $10,000. Of course, be careful to evaluate your retirement plan carefully because you will lower your retirement savings and the accumulated tax-free earnings you're making in the IRA. Make sure your finances are in tip-top shape, your debts are paid off, and that you're not stretching beyond your means to buy this house.

Things to Know

1) Eligibility: The IRS requires that the money be used for a first-time home purchase. If you have owned a home, but not in the previous two years the IRS will consider you a first time home buyer. If you're buying for a family member, you can still use your IRA if the recipient is a first time home buyer. If you are buying a house with someone, you're both eligible to withdraw $10,000 each from your own IRAs provided you each meet the guidelines. While you may be able to raid your IRA fund again later, the IRS does place a lifetime limit of $10,000. So you can withdraw $5K in two separate transactions, or $10K in one. But that's all.

2) Remember that you can only withdraw $10K per person and any additional amount withdrawn will incur the standard early withdrawal penalty of 10%.

3) Taxes are a consideration as regular IRA contributions are usually pre-tax (unless you're contributing to a Roth IRA, which I discuss below). This means you will have to pay taxes on your withdrawal. Your $10,000 withdrawal, then, is worth $6700 after taxes. The taxes come from the $10K IRA withdrawal itself, so you can't save up to buy them before April 15 comes around again.

If you're withdrawing from a Roth IRA, you must have held the IRA for at least five years. Also, while your initial investment is tax free, if the money you're collecting includes investment earnings, you'll have to pay taxes on those increases.

4) While the IRS classifies this as "borrowing," you actually can't pay the money back. The IRS has limits on how much you can contribute to an IRA or Roth IRA each year and if you're already maxing those out, you won't be able to return the $10,000 you withdraw and you'll lose the tax-free earning potential.

5) Time your withdrawal carefully because the IRS only gives you 120 days to use the funds before it considers that you've withdrawn them for another purpose, even if you eventually use it for a house. If you run into an emergency in closing, you can return the money within that 120 days and take it out once more within the year. You must take the money out before you close, so retroactive payments do not count.