||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.
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.
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.
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