You can even share your IRA wealth. The IRS says the first-time homebuyer using your IRA funds for a down payment can be you, your spouse, one of your children, a grandchild or a parent.
You must use the IRA funds within 120 days of withdrawal to pay qualified acquisition costs. This includes the costs of buying, building or rebuilding a home, along with any usual settlement, financing or closing costs.
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Different treatment for Roths
These homebuying IRA options apply to traditional retirement accounts. The rules are a bit different for a Roth IRA.
The $10,000 you take out for your first home is a qualified distribution as long as you've had your Roth account for five years. You can take out your retirement money without penalty, and because Roth earnings are tax-free, you'll have no IRS bill, either.
If, however, you opened your Roth IRA less than five years ago, the withdrawal is an early distribution. As with a traditional IRA early withdrawal, a Roth holder can use the first-home exception to avoid the 10 percent penalty but might owe tax on earnings that are withdrawn.
You can reduce the tax bite by first withdrawing the already-taxed contributions you made to your Roth. IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs), has details.
Members of the military reserves also can receive early IRA distributions without penalty. To qualify, the following conditions must be met.
- You were ordered or called to active duty after Sept. 11, 2001.
- You were ordered or called to active duty for a period of more than 179 days or for an indefinite period because you are a member of a reserve unit.
- The distribution is from an IRA or from an elective-deferral plan, such as a 401(k) or 403(b) plan or a similar arrangement.
In addition, the early distribution cannot be taken before you received your orders or call to active duty or after your active-duty period ends.
Personnel eligible for this early withdrawal exception include members of the Army or Air National Guard; the Army, Naval, Marine Corps, Air Force or Coast Guard Reserves; and the Reserve Corps of the Public Health Service.
Allowable, but not preferable, distributions
Early IRA withdrawals also are penalty-free in a few other instances. Unfortunately, most of these are hardship situations that no taxpayer wants to face.
Hardship circumstances for penalty-free withdrawals
- Payment of excessive unreimbursed medical expenses.
- Payment of medical insurance premiums while unemployed.
- Total and permanent disability.
- Distribution of account assets to a beneficiary after you die.
You also can get IRS-approved early access to your nest egg if you take IRA money on a specific schedule. Known as substantially equal periodic payments, this method allows you to begin withdrawing from your IRA early -- as long as the amounts are determined by an IRS-calculated life expectancy table.
And don't forget that the early withdrawal exceptions do not eliminate your tax bill if you take the money out of a traditional IRA. When you take the money out of such an account, regardless of your age or the purpose of the withdrawal, you'll owe your regular tax rate on the amount.
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