Using IRA Funds to Finance a Home Purchase

Posted in on March 14, 2014

There has been much publicity surrounding the First-Time Homebuyer Credit under the American Recovery and Reinvestment Act of 2009. Many young families and individuals are rushing to take advantage of this limited time offer and in their haste, may miss other favorable tax regulations that facilitate and encourage homeownership. One such code provision, of particular interest to young professionals, relates to early withdrawals from Individual Retirement Accounts (“IRAs”). The law allows individuals to receive distributions from their IRAs to pay up to $10,000 of first-time homebuyer expenses, without incurring the 10% early withdrawal penalty that usually applies to early withdrawals from an IRA – i.e. withdrawals before age 59 & 1/2. Although there is no penalty, please note that regular income taxes will apply to the distribution.

There are some things you should know about this tax benefit. One is that a “first-time homebuyer” does not have to be a first-time homebuyer in a strict sense. The law defines “first-time homebuyer” simply as someone who has not owned a home for two years. Therefore, instead of benefiting only traditional “first-time homebuyers” the law also helps “not-recent” homebuyers. Also, you may take advantage of this provision even if you yourself are not the first-time homebuyer, since the first-time homebuyer can be the IRA owner, his or her spouse, or any of their children, grandchildren or ancestors. You may therefore withdraw from your IRA, without penalty, in order to help your son or daughter with his or her down payment.

The $10,000 limit is a lifetime limit on the amount of withdrawals that can be pulled out of an IRA penalty-free under the first-time homebuyer provision. Although the law is not clear, it seems permissible that, for example, a husband and wife helping one of their children with a down payment, can each withdraw up to $10,000 from their respective IRAs without incurring any penalty for early withdrawal.

If you are interested using IRA funds to purchase a first home for yourself or for a qualified relative, or if you would like to discuss other short-term or long-term tax planning strategies, please contact Baker, Braverman & Barbadoro.