Scraping together enough money to make a down payment on a home can be a challenge that keeps people renting rather than owning. If you have money saved in an individual retirement account, you may be able to use some of those funds without paying an early withdrawal penalty, even if you're younger than 59 1/2 years old. However, the exception only applies to purchasing a home that you will use as your main residence, according to the U.S. legal code.
First-Time Homebuyer Defined
To qualify for the early withdrawal penalty exception per IRS guidelines, you must not have owned an interest in a main home in the last two years. If you're married, this must be true of your spouse as well. For example, you wouldn't qualify if your name isn't on the deed to your current home if the deed is in your spouse's name instead.
However, the exception can be used to pay for a home for your child, grandchild or parent if that person qualifies as a first-time homebuyer. For example, say you want to help your son buy his first home. As long as he meets the requirements, you can take out money from your IRA for his down payment.
Limits on Exception
The money must be used for qualified acquisition costs within 120 days of taking the distribution. These qualifying costs include the purchase price to buy or build a home, as well as any settlement, financing or closing costs. In addition, the exception is limited to $10,000 over the course of your lifetime. For example, if you use $7,000 to purchase your first home and later want to help your daughter buy a home, you only have $3,000 of the exception left.
If you took out money to buy a first home and the contract was canceled or delayed, you can return the money to the IRA within 120 days of the original distribution and have it treated as a rollover.
Buying Other Real Estate With IRA Distributions
You can withdraw money from your IRA at any time, for any purpose, but it could cost you extra in taxes. For example, if you wanted to buy a vacation home and took out $10,000 from your traditional IRA at 48 years old, you would owe taxes on the $10,000, plus an additional $1,000 early withdrawal penalty because you would not qualify for the first-time homebuyer exception.