In most cases, if you withdraw money from your IRA before you turn 59 1/2, you will receive a 10 percent penalty from the IRS. There is an exception to this rule, however, for those purchasing a home for the first time -- or at least, for the first time in awhile. People who want to take advantage of this rule need to plan ahead and proceed carefully to ensure that the withdrawal stays penalty free.
Who is a First-Time Homebuyer?
For the purpose of an IRA withdrawal, the person buying the home cannot have owned a primary residence in the last two years. The IRA owner does not have to be the one making the purchase, either. The home buyer can be a spouse, parent, child or grandchild. If you are married, you can both pull from your IRAs, but note that you must both qualify as first-time buyers if you are going to purchase the residence together.
Qualified Costs and Time Limits
You can use your IRA withdrawal to fund the purchase of a primary residence, including building and remodeling expenses. You can cover closing and financing costs and any other normal expenses incurred as part of the home purchase. You must be efficient, however. The withdrawal has to be used within 120 days of the acquisition date of the home. If you cannot use the money for some reason, you can re-deposit it and it will be treated like a rollover.
The most you can withdraw for the first-time homebuyer exclusion is $10,000. This is a lifetime limit; you can split it up, but you cannot take any more. Remember that separate IRA accounts are treated as one IRA for this purpose.
Specifics for Roth and Traditional IRAs
If you withdraw your money from a traditional IRA, you will owe tax on the distribution at normal income tax rates. Roth IRAs are more complicated. To avoid a penalty, the account must be open for at least five years. If you have converted traditional IRA contributions in the account, those must also be at least five years old.