IRA Withdrawal Rules for a Home Purchase

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The rules on individual retirement accounts discourage any withdrawals before the age of 59 1/2. With a traditional IRA, these early withdrawals earn a 10 percent penalty, on top of any taxes due on the earnings. For a Roth IRA, there's no penalty if the account has been open for at least five years. If you're in the market for a house and want to tap that IRA for a down payment, you may qualify for a waiver of any penalty that might otherwise apply.

Limits on Withdrawals

The IRS allows an early withdrawal of up to $10,000, without penalty, for the purchase of a home. This exception applies to anyone who owns an IRA, and who has not owned a principal residence within the two years preceding the purchase. A married couple with two IRAs among them could access up to $20,000 penalty-free, and in some cases the funds can assist someone else's purchase of the property. The actual buyer of the home can be the individual making the withdrawal, his spouse, a child, a grandchild or a parent.

120-Day Deadline and Qualified Costs

The IRS sets an important deadline on these home-buying penalty-free withdrawals. The account holder must pay out the funds -- i.e., close on the house -- within 120 days of the date of the distribution from the IRA. The money must be used for qualified acquisition costs, which can include the cost of purchase, building, or rebuilding the home, as well as financing and closing costs. The home must be the main or principle residence -- property bought as an investment or for a business won't qualify.

Income Taxes on Withdrawals

Although the IRS will waive the 10 percent penalty for qualified purchases, a home-buyer still will owe taxes on the distribution, if he's withdrawing from a traditional IRA. Roth IRA contributions are made with after-tax money, therefore no income tax is due on withdrawals, as long as they are made either with original contributions or from "converted" funds deposited from another Roth. If contributions and conversions are accounted for, any additional funds would be counted as account earnings -- which are taxable, even in a Roth.

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