Using Your IRA to Buy Your First Home

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Hey Taylor - I’m looking into buying my first house and understand I can use IRA funds for the purchase without being penalized. How hard or easy is it to make this withdrawal? - Spencer

Hey Spencer - How mad will you be if I say it’s both hard and easy? In theory, as long as you meet the requirements, you’ll get a check for the requested amount and the IRS will leave you and your money alone. There are a few details, however, that make it all a little trickier than that.

1. The limit is $10,000. If you had been thinking you could buy an entire house using what’s in your IRA, I’m sorry to be the bearer of bad news. The amount you can withdraw caps at $10,000, meaning you really should only use these funds as a sweetener for your mortgage terms. If you’re in a position where you really need that $10,000 to make buying a house feasible, I wonder how long it will take you to recoup the losses from your retirement fund. While a house should go up in value, it’s mostly just a money drain while it’s your primary residence. Make sure you put a lot of thought into where that $10K actually has the most value.

2. You have to spend it within 120 days. Buying a house, especially when it’s your first, can take a lot longer than expected. 120 days might feel like a lot of time, but it’s gone in the blink of an eye when real estate is involved, and it’s gone even faster if something falls through and you have to start over. If something goes wrong and you don’t have proof of purchase within the allotted time, you run the risk of IRS backlash and a potential penalty. Imagine paying the penalty on an IRA withdrawal that you made exclusively because you don’t have to pay a penalty. The thought makes me shudder.

3. Are you sure? Retirement money is not something to be messed with. If you don’t have it when you need it, there’s no quick fix. One of the biggest problems with using your IRA savings is the mental acknowledgment that the money can be used. There will always be bills to pay and things to buy, and the only thing keeping you from putting retirement funds toward other needs is understanding that you have to save that money for later. If you start bending the rules, even with the best intentions, you could head down a path that puts you in a tough spot later on.

The IRS allows for a few exceptions as a means of helping people in dire situations. If you head to, you can see a piece I wrote about most of the other penalty-free options. As you think about what to do, remember that the rules exist to help you out when you are in a bind, so just be careful not to take action unless it's truly necessary. Good luck, Spencer!