Can I tap my IRA to help with the purchase of my first home?
Question:) When do I take the 10k out of my IRA for a first time home purchase? I know the process of finding a home in my area could take a significant amount of time.
Money Coach’s Answer: Congratulations on taking the leap into home ownership!
The Basic Rule for IRA Distributions and Real Estate Purchases
For those who are not familiar with the rules, the IRS allows first time home buyers to withdraw from an Individual Retirement Account (IRA) for the purchase of their first owner-occupied home. When you tap your traditional IRA, you will not have to pay any early withdrawal penalty for accessing these funds. You will still need to add the amount withdrawn to your total income and it will be subject to income taxes.
Step Into the Time Machine, Sherman
So, first time home buyers get a break. Now you might think that term (first time home buyer) is pretty straightforward. But we’re dealing with the IRS here.
Good news! The definition of first time home buyer is pretty flexible here. As long as you or anyone else on the sales contract (let’s say your spouse) have not owned a primary residence for the previous two years, you qualify as a first-time home buyer.
Even better news! The IRS goes further to say that your early distribution is eligible for this special treatment and you avoid the early withdrawal penalty as long as the proceeds are to be used by any direct relative who is buying a property and has not owned a primary residence within the past two years. So this can be not just you but your spouse, kids, grandkids or parents.
Watch the Clock … 120 Days or Bust
You must use the funds for the purchase of a property within 120 days of the withdrawal. The funds may be used for closing or settlement costs as well as for the down payment, building or renovating the subject property.
Generally, funds held with most any IRA custodian can be accessed within a few days. If you are invested in mutual funds, your custodian will need to liquidate the positions and a check will be mailed out after the funds settle which takes three days from the trade date. Usually, the trade date is the business day after your call if calling after 4 PM ET since trades must be made before the stock market closes. If you’re calling during the business day (before 4 PM ET), it may be processed using the price (or Net Asset Value) of the mutual fund shares as of the close of business.
So depending on the delivery option (US Mail, overnight courier or wire transfer), you should get your funds within a week of your call.
Your safest bet is to wait until you have a closing date from your bank and then make these arrangements a couple of weeks before.
If you need the funds for a down payment, I would caution you to use another resource first. Maybe you can use a credit card (get the points) or cash advance. Then use the IRA proceeds to cover the costs when the deal closes. This avoids the risk of taking the money out and then risking the withdrawal being reclassified and then subjected to the 10% penalty because the deal fell apart. Although you can withdraw money from an IRA and return it within 60 days without any tax consequence, this time frame may not be so neat in the real world of real estate negotiating, financing and then closing.
