Buying a home is often one of life’s most significant and challenging purchases, and that pressure is often compounded by early upfront costs, like down payments and closing fees.

Many prospective buyers wonder whether it’s possible to use retirement savings toward a home purchase. The answer is yes, under certain circumstances, you can tap into a Roth IRA to help buy your first house.

However, before you decide to pursue that path, it’s essential to understand when you can use retirement savings, how much you can use, and the potential implications of doing so. These frequently asked questions can help you decide if using retirement savings to purchase your home is right.

1. Do I Have To Pay a Penalty If I Use My IRA to Buy a House?

Many people hesitate to withdraw funds from their IRA because early distributions typically trigger a 10% penalty. After years of saving, the prospect of losing part of those funds can be discouraging. However, certain exceptions allow you to avoid this penalty under specific circumstances.

The 1997 Taxpayer Relief Act created exceptions for qualified expenses, including a first-time home purchase. This means you may withdraw funds without the 10% penalty. Keep in mind, though, that while the penalty is waived, distributions from a Traditional IRA are still subject to regular income taxes.

 2. How Much Can I Withdraw From My IRA to Buy a House Without Penalty?

Single-party account holders receive a lifetime contribution of up to $10,000 to purchase their new home.

If you are married, you can pull contributions from both retirement accounts. You could potentially have $20,000 of residential cash without paying any penalty, as long as it’s an approved “qualified distribution.”

3. Can I Use My IRA to Buy a House Before Retirement?

Yes. The IRS offers penalty-free exceptions to individuals who want to use their IRA funds to purchase their first home. Other IRS-set exceptions include covering medical expenses, furthering education, unexpected job loss, disability, or active duty in the military.

4.  Does the IRA Homebuyer Withdrawal Have to Be for My Own House?

No. Others in your family can use the “first-time homebuyer” arrangement. The IRS says the first-time home buyer using the funds can be you, your spouse, a child, a grandchild, or a parent.

This flexibility means you can support a family member’s home purchase even if you are not the buyer yourself. Remember, though, that the lifetime $10,000 withdrawal limit still applies, and once it has been used, you cannot claim the exception again for another relative.

5. Is There a Time Limit for Using IRA Funds to Buy a House?

Once you withdraw funds from your IRA, you must use them within 120 days. To avoid missing the deadline, it’s important to coordinate the timing of your withdrawal with your purchase or closing date.

If the funds are not used within 120 days, the withdrawal could lose its penalty-free status and may be subject to taxes and penalties. Careful planning can help you maximize the benefit of this exception.

6. What’s the Difference Between Using a Roth IRA vs. a Traditional IRA to Buy a House?

Both Roth and Traditional IRAs allow you to use funds for qualified first-time home purchases, but the rules differ. With a Roth IRA, you can always withdraw from contributions tax and penalty-free, as long as the account has been open for five years or more. That means you can make a larger penalty-free withdrawal if your contributions exceed $10,000.

With a Traditional IRA, you can also withdraw up to $10,000 for a first-time home purchase without the 10% early withdrawal penalty, but the funds you take out are still subject to income tax.

 7. Can I Use My IRA More Than Once to Buy a House?

Yes, but with strict limitations. The IRS allows up to $10,000 in penalty-free withdrawals from your IRA over your lifetime for qualified first-time home purchases.

“First-time homebuyer” doesn’t necessarily mean your very first home. Under IRS rules, it applies if you (or your spouse, child, grandchild, or parent) have not owned a principal residence within the last two years.

That means you could use the exception against later if you still have unused funds from your $10,000 lifetime limit and the buyer qualifies as a “first-time homebuyer” under the two-year rule.

For example, if you withdrew $6,000 for your home, you could later use the remaining $4,000 to help a child buy their first home. However, penalty-free withdrawals are no longer allowed once the $10,000 cap is reached.

8. Do I Have to Be a First-Time Homebuyer to Use My IRA for a House?

Not necessarily. The IRS ruled that first-time home buyers and those who have not owned a home for two years can use this relief fund.

You can successfully utilize the Relief Act if you have not owned a home during the two years before purchasing a home. As stated, you can also use this fund to help others purchase their first home.

9. What If I Don’t Qualify to Use My IRA to Buy a House?

If you don’t meet the first-time homebuyer rules, your options depend on the type of IRA you have:

• Roth IRA. You can always withdraw the contributions (the money you put in) tax-free and penalty-free. However, the earnings portion may be subject to taxes and penalties unless you meet the five-year holding requirement and qualify for another exception.

• Traditional IRA. Any early withdrawal that doesn’t qualify for an exception will be taxed as ordinary income and may also incur the 10% early withdrawal penalty.

Investing In Your Future

First-time homebuyers may be able to use their IRA funds to help purchase a new home. While this option can ease the burden of upfront costs, it’s important to understand the rules, limits, and potential tax consequences.

Always perform your due diligence before taking any major distributions from your Traditional or Roth IRA. Consult with a trusted financial advisor today and discover how you can purchase a new home using your IRA.