Millions of Americans use a traditional or Roth IRA to save for retirement. However, you may face a large financial hurdle long before you reach your golden years: finding the cash to buy a home.
This might lead you to wonder: Can you use an IRA to buy houses?
Technically, there’s nothing preventing you from doing so. But should you? That depends on your circumstances. Here’s a closer look.
Can I Use an IRA to Buy a House?
If you’re a first-time homebuyer, you can use your IRA (either traditional or Roth) to help fund the purchase.
Ordinarily, you would owe a 10% penalty on most distributions from an IRA that you take before reaching the age of 59 ½.
There are a few exceptions to that rule, however, and being a first-time homebuyer is one of them.
How Much Can I Take Out of My IRA to Buy a House?
You may be asking yourself the following questions: “Can I use a traditional IRA to buy a house? What about a Roth?” The answer to both is “yes.”
The IRS allows you to withdraw up to $10,000 from an IRA penalty-free if you qualify as a first-time homebuyer.
Either type of IRA can qualify for the first-time homebuyer exemption.
The IRS says you qualify as a first-time homebuyer if you haven’t owned a primary residence in the past two years. However, you can only make this type of penalty-free withdrawal once during your lifetime.
Do You Have to Pay Taxes on the Money You Withdraw?
When you take advantage of the first-time homebuyer exemption, you don’t have to pay an early withdrawal penalty. However, that doesn’t necessarily mean you won’t owe taxes.
Whether your withdrawal will be taxed or not depends on the type of IRA you’re withdrawing from.
Traditional IRA
If you save in a traditional IRA, you contribute pre-tax dollars to the account. Funds continue to grow tax-deferred until you make a withdrawal.
When you withdraw money in retirement — or when buying a home — it’s taxed as regular income.
Your withdrawal will be taxed at your current income tax rate. So, depending on your tax bracket, you might end up owing more than you anticipated.
Roth IRA
Can you use Roth IRA funds to buy a house? You can, and it might prove to be advantageous.
Unlike a traditional IRA, a Roth IRA is funded with post-tax dollars. Once your funds are in the account, they grow until you withdraw them.
Because you’ve already paid taxes on the money you have used to make contributions to the account, you won’t owe taxes when taking it out to purchase a home. And you can remove this money before you turn 59 ½.
However, if you withdraw earnings you have made on your investments in a Roth before that age, you generally owe taxes — unless you are a first-time homebuyer using the money to buy a house.
In that case, you can withdraw up to $10,000 both penalty-free and tax-free as long as you have had the Roth IRA for at least five years.
Is It Smart to Use an IRA to Buy a House?
There’s no one-size-fits-all answer to this question. If you’re ready to buy a house and the money in your IRA can give you a head start, using it might seem like the obvious solution.
However, if you’ll owe a lot in taxes, it might be best to choose another method.
Not sure whether using your IRA to buy a house is the right call? It may help to consider a few pros and cons.
Pros of Using an IRA to Buy a House
If buying a home is a life goal and you’re looking for a bit of extra help achieving it, you might consider using some of the funds in your IRA. Here are some of the benefits of doing so:
- You can withdraw money early without having to pay a penalty.
- You can use the funds to cover a down payment, closing costs or related expenses.
- You might be able to purchase a home sooner than you otherwise would.
The first-time homebuyer exemption could accelerate your homebuying journey. For many people, that makes it well worth it.
Cons of Using an IRA to Buy a Home
However, you should also consider these possible downsides of using an IRA to buy a house:
- If you take funds out of a traditional IRA, you might owe income tax.
- Removing money from your retirement fund means you may lose out on compound interest, which could result in a smaller nest egg.
- The $10,000 exemption for first-time homebuyers is a lifetime limit, so you can’t take advantage of this provision again in the future.
Ultimately, using an IRA to buy a home will be the right choice for some people and the wrong one for others.
Should You Use an IRA to Buy Houses?
Can you use an IRA to buy a house? The main point of your IRA is to help you set aside funds for retirement. However, depending on your circumstances, you might be able to use an IRA to buy a house, too.
Remember that this is a major decision, and it’s not one you should take lightly. By taking the time to weigh your options, you’ll be better equipped to make the right choice for you.
