Dear Dr. Don,
We have a 7-year-old special needs child who requires our constant care and we expect this will always be the case.
We currently rent a two-floor home, but it is becoming increasingly difficult to move up and down stairs with our child. We would like to move into a single-level home. It's not easy to find a rental in our area, although there are some one-story homes on the market. We don't have savings for a down payment, but we do have money in an individual retirement account. Is there a program or tax break that would allow us to use the IRA money for a down payment, or would we get whacked by the IRS?
-- Richard Rancher
When you make tax-deferred contributions to an IRA, the money will be taxed when you take it out. That's something quite different from getting "whacked" by the IRS.
You can't avoid the income taxes, but you should be able to avoid the 10 percent penalty tax. That's because taking an early distribution as a first-time homebuyer is one of the exceptions to the penalty tax. You can receive distributions of up to $10,000 from your IRA for a first home without being exposed to the penalty tax.
Despite the name of the exception, it doesn't necessarily have to be your first home for you to qualify as a first-time homebuyer. From IRS Publication 590, "Generally, you are a first-time homebuyer if you had no present interest in a main home during the two-year period ending on the date of acquisition of the home which the distribution is being used to buy, build or rebuild. If you are married, your spouse must also meet this no-ownership requirement."
As to loan or down payment programs for parents of a special needs child, your best source of information might be the state or local housing authority. I suggest beginning there because a down payment assistance program would allow you to keep more retirement money working for you in an IRA while buying the house you want for your family.