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Ask Dr. Don

First-time home buyer

Dear Dr. Don,
I am a first-time home buyer. Should I use money in a Roth IRA and a traditional IRA as a down payment? I heard that if I use it toward a home that I would not be penalized.

Dear Linda,
As a first-time home buyer you can withdraw money out of a Roth IRA or traditional IRA without incurring the 10 percent penalty tax for an early redemption. The following comes from IRS Publication 590, Individual Retirement Arrangements (IRAs):

First home. Even if you are under age 59 1/2, you do not have to pay the 10% additional tax on distributions you receive to buy, build, or rebuild a first home. To qualify for treatment as a first-time homebuyer distribution, the distribution must meet all the following requirements.

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1) It must be used to pay qualified acquisition costs (defined later) before the close of the 120th day after the day you received it.

2) It must be used to pay qualified acquisition costs for the main home of a first-time homebuyer (defined later) who is any of the following.

a) Yourself.
b) Your spouse.
d) Your or your spouse's grandchild.
e) Your or your spouse's parent or other ancestor.

3) When added to all your prior qualified first-time homebuyer distributions, if any, the total distributions cannot be more than $10,000.

First-time home buyers using money from a Roth IRA account also have to consider how long the funds have been held in the account. Funds held in a Roth IRA for less than five years may be subject to taxation, including the penalty tax. You don't have to pay income taxes on the after-tax dollars you invested in the Roth IRA, but the investment earnings may be taxable if they don't meet the holding period requirement. See this Bankrate feature for more guidance on using Roth IRA monies as a first-time home buyer and consult with your tax professional.

Since most homeowners will be able to defer and eventually avoid paying capital gains taxes when they sell their homes, you can make a decent argument for how withdrawing the $10,000 from the IRA and Roth IRA into an investment in a home can make economic sense, even after paying the income taxes due on the distributions.

-- Posted: Aug. 22, 2003

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See Also
10 ways to come up with a down payment
Help for first-time home buyers
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