Rules for Withdrawing From Your Retirement Fund for a First-Time Home Purchase

A retirement fund such as an Individual Retirement Account (IRA) is designed to help you save for retirement, not to help you buy a home. As a result, you may face certain taxes and penalties if you take a retirement distribution for a home purchase. With some plans, such a distribution may not even be allowed. The most flexible retirement plan when it comes to first-time home purchases is the IRA.

  1. Traditional IRA

    • With all after-tax retirement plans, including the traditional IRA, the Internal Revenue Service imposes a tax on withdrawals taken before age 59 1/2. Known as the early distribution or premature withdrawal penalty, the charge amounts to 10 percent of the withdrawal. One of the exceptions to this penalty, at least when it comes to traditional IRAs, is for the first-time purchase of a home.

      The IRS has a fairly lenient interpretation of the term "first-time," so you can take an early distribution without penalty when buying a home for yourself, your immediate family, your parents or your grandchildren. Additionally, the purchase does not technically have to be your "first time" home purchase. To meet the requirement, you must simply not have owned a home for the two years immediately prior to your home purchase. The IRS does impose a lifetime limit of $10,000 on withdrawals for first-time home purchases, however.

    Roth IRA

    • The withdrawal rules for a first-time home purchase from a Roth IRA are similar to those of a traditional IRA. Specifically, you can take out up to $10,000 for a first-time home purchase from a Roth IRA and avoid the 10 percent penalty, even if you are under age 59 1/2. As long as you have had your Roth open for at least five years, your Roth offers you the additional advantage of allowing for tax-free distributions, unlike with a traditional IRA in which all distributions are taxable.

    401(k) Plans

    • 401(k) plans operate a little differently from IRAs when it comes to first-time home purchase distributions. To get money from your 401(k) for a first-time home purchase, your plan administrator much allow such a distribution, typically under the label of a hardship distribution. If such a provision exists, you can take money from your 401(k) for a first-time home purchase, but you still must pay both income tax and the 10 percent early withdrawal penalty tax, if you are under the age of 59 1/2. Unlike with IRAs, the IRS does not waive the 10 percent penalty in the case of 401(k) plans.

    Other Retirement Plans

    • Most corporate retirement plans follow the mold of the 401(k) plan. For example, a 403(b) plan, which is essentially a 401(k)-type plan for schools and other nonprofit organizations, does not offer penalty-free distributions for first-time home purchases. Only IRAs, which are individual rather than corporate retirement plans, offer the early distribution waiver. With the exception of Roth IRA distributions, withdrawals from all retirement plans, whether corporate or individual, are typically taxed at ordinary income tax rates.

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