Use Your Traditional IRA to Buy a House

Using an IRA for a house purchase can provide you with the funds that you need for a down payment. Even though you cannot raid your IRA for just anything, the IRS does allow you to take funds out of the account to purchase a home for the first time. Here are the basics of using your IRA to purchase a home.

First-Time Home Buyer Provision

As long as you are a first-time home buyer, you can use the money in your IRA to purchase a house. In order to qualify as a first-time home buyer, you have to have not owned a house for the last two years. When you utilize this program, you can take as much as $10,000 out of your IRA in order to purchase the house. This $10,000 is a lifetime limit which means you can only do this once. When you take money out of your traditional IRA, you will have to pay taxes on the amount that you take out. You will not have to worry about the 10 percent early distribution penalty that usually comes with an early withdrawal. 

Qualified Purchases

When you take this money out, you can only use it on qualified purchase transactions. This means that the money has to go towards the actual purchase of the house. It cannot be used for associated expenses. You can use the money to pay for the down payment on a house that you are building or buying. You can also use the money to pay for closing costs on the home. However, you cannot use the money to pay for furnishing the home, fixing it up, or anything else associated with it. If you use the money for these expenses, the IRS will charge you a 10% early distribution penalty on the money. 

How to Get the Money

In order to gain access to this money, you will need to contact your IRA custodian. They will typically have a form that you need to fill out in order to request this withdrawal. You will fill out the form with the appropriate information and give it back to the company. They will process the request and they will then send you a check for the amount that you request up to $10,000. 

Should You Use the Money?

Even though you technically have the ability to use the money in your IRA to purchase a home, that does not necessarily mean that you should. In fact, many experts say that you should not access the money in your IRA for anything until you retire. If you use the money before you reach retirement, you risk putting yourself in a negative financial position. You need to keep as much money as possible in your IRA so that it can be growing in value. If you take out money, you will lose the opportunity to invest it which means that you will have to worry about the opportunity cost of the transaction as well.

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