You may be considering dipping into your retirement savings to buy a residence, come up with a down payment or cover closing costs. There are plenty of pros and cons when it comes to using your IRA to pay for or help pay for a house. We outline those below. If you’re strongly considering doing so, it’s a good idea to speak with a financial advisor. SmartAsset’s free advisor matching tool can match you with advisors that serve your area.
When to Use an IRA to Buy a Home
IRAs are designed to help you save for the future and long-term retirement expenses. Because of this, you typically need to wait until the age 59 ½ before you can withdraw any savings. If you take out any before that age, you face income taxes and a 10% penalty fee.
Despite this, there are some scenarios where you can withdraw funds early. You might be familiar with exemptions, such as hardship withdrawals. Under this, the IRS makes an allowance for first-time homebuyers to use money from the IRA toward their first home.
For the IRS, you qualify as a first-time homebuyer if you (and your spouse) did not own a primary residence at any point in the past two years. You mark the two years from “the date of acquisition,” i.e., the date you enter a contract to purchase the home or when construction of the home begins.
How to Use an IRA to Buy a Home
The IRA exemption comes with a maximum amount. When buying your first primary residence, you can withdraw up to $10,000 from your IRA. This applies per person, though. So, each spouse of a married couple can withdraw up to $10,000 from their respective IRAs.
Any money you take out may go toward qualified acquisition costs within 120 days. That includes:
- The cost of building, rebuilding or buying a house
- Any normal or reasonable financing, settlement or closing costs.
You can also use that money to help others qualify. The IRS allows IRA owners to avoid penalties and withdraw funds for other first-time homebuyers in their life. That includes your child, grandchild or parents. However, you must stick to the $10,000 individual lifetime limit.
Keep in mind that while you avoid penalties, you still have to pay taxes on the amount you withdraw. Therefore, review your tax bracket information so you can plan accordingly.
Benefits of Using an IRA to Buy a Home
Using your IRA may not be the perfect solution. But it can help you or someone in your family purchase their first home. And that is a valuable investment to many Americans.
Also, if you’re young, you still have time to rebuild your savings. So, you may not necessarily feel the loss in your retirement fund. You can put the $10,000 toward your first home and still live out your golden years comfortably. It helps if you plan to contribute the maximum amount to your IRA each year, too.
Downsides of Using an IRA to Buy a Home
Homeownership is an important part of financial security for many people. However, you shouldn’t underestimate the cost of retirement. When you borrow from a retirement fund today, you take money from your future self.
Based on Bureau of Labor Statistics data from 2019 to 2020, people 65 years and older spend an average of $48,106 per year. Factor in your life expectancy – that’s a sizable amount. By withdrawing funds early, you cut down your funds’ ability to build through compound interest. So, you potentially miss out on vital growth you need to cover those expenses.
In addition, you may not qualify for the first-time homebuyer exemption. In that case, using funds from your IRA will mean paying the 10% penalty fee on top of income tax.
Should I Use My IRA to Buy a Home?
Just because you can use your IRA to buy a home doesn’t mean you should. Most people open an IRA to save for the future. Typically, you can’t even touch the funds until age 59 ½ without facing significant costs. And many people may benefit from leaving their IRA untouched.
When you avoid using your IRA, you give compound interest a chance. Plus, that money grows tax-deferred, and you lower your taxable income when you contribute.
But, housing prices have skyrocketed over the past few years. As a result, the funds from your IRA may make a significant difference in you purchasing a home. You may also have time before your retirement years, allowing you to recover from the withdrawal.
In the end, the best idea is to seek professional counsel. Speak with a financial advisor before you make any decisions regarding your IRA. They can help you evaluate your situation and decide the best course of action for you.
Homeownership is a hallmark of the American Dream. Many people are willing to sacrifice future comfort for this goal by using a hard-won retirement nest egg. But we should weigh this option carefully before we go through with it. Using funds from your IRA may help you with your down payment or closing costs, but that money may be better suited elsewhere. For example, you can save for a future emergency.
Tips for Buying a Home
- Buying a home is complicated and costly, especially if you make any mistakes. You may want to talk to a financial advisor before you start. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- You shouldn’t necessarily bank on your retirement account funds to afford a home. You should budget and research your mortgage options far ahead so you know how much house you can afford.
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