Can I Buy a Home With My IRA?
If you have money sitting in an IRA, or individual retirement account, you may be wondering how best to invest that money. You might have even considered whether or not you can buy a home with your IRA. In most cases, you can use IRA funds toward the purchase of a home, but there are some key things you should understand before you attempt to do so.
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First-Time Home Purchase
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You can use funds from your IRA toward the purchase of a home if you qualify as a first-time home buyer. According to Kimberly Lankford, Contributing editor of Kiplinger's Personal Finance, a first-time home buyer is anyone who has not owned a home during the past two years. You can withdraw as much as $10,000 from a personal IRA without incurring any early withdrawal penalties, as long as the money is applied toward the purchase or construction of your family home within 120 days. Additionally, your spouse can also withdraw up to $10,000 from a separately owned IRA, which can be combined and applied toward the home purchase.
Tax Repercussions
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Keep in mind that using money from an IRA to purchase a home does not come without a cost. Although you are exempt from the 10 percent early withdrawal penalty providing you follow the IRS rules for applying IRA funds toward a home purchase, you are not exempt from taxes. Since IRA contributions are allowed to grow tax-deferred until you reach retirement age, a withdrawal prior to retirement requires that you pay income taxes on that money. You must submit IRS form 5329 along with your tax return to report IRA distributions prior to age 59 1/2.
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IRA Investing
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Another option you have to purchase a home with your IRA is to use the funds in your portfolio to invest in real estate. Most IRA funds are invested in stocks, mutual funds, and other types of investments selected by the IRA manager. Alternatively, you can set up a trust or join an existing trust to invest your IRA money in one or more pieces of single-family, vacation, or multi-family real estate. You are restricted from living in a property yourself, but in most cases, you can move into a property once you reach retirement. You can buy and sell property for profit, or purchase long-term investment property and invest the rental income back into your IRA.
Self-Directed IRA
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In order to invest your IRA funds in real estate, you must have an account that is set up for this type of investing, notes Laura A. Bruce of Bankrate. An IRA which allows you to make real estate investments is known as a self-directed IRA, and it requires an independent agency to serve as trustee or custodian for the account.
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