Using Your Traditional IRA for a Down Payment

Ready to buy your first home, but you don’t have enough of a down payment saved; no need to worry, you may be able to tap into your traditional IRA for down payment funds. Having a down payment is one of the biggest challenges for first-time homebuyers.  Saving for the down payment is generally a difficult task, requiring discipline and sacrifice.

What is an IRA?  An Individual Retirement Account that is designed for tax-free or tax-deferred savings for your later years. With a traditional IRA, you can contribute up to $4000 of tax-deductible money each year, however, you can’t withdraw money from a traditional IRA before you turn 59½ without paying a pretty steep penalty, usually 10 percent.

In 1997 the Taxpayer Relief Act changed some of the IRA rules.  The act allowed  IRA owners to withdraw money early, penalty-free, for specific circumstances.  Luckily for individuals with thoughts of home buying, they seemed to be dealt a good hand.  Several of the circumstances the Taxpayer Relief Act included was buying, building or rebuilding a home.  For any other type of withdrawal, the 10 percent penalty would still apply.

Suggested Program: Home Plus Program

Tapping into your retirement funds is usually advised against by most financial advisors, however, if you set up an IRA that is designated for the sole purpose of saving for a down payment you won’t really be tapping into your retirement savings.   You may actually find several benefits from taking this course of action.

So, first-time homebuyers can take advantage of these accounts to pull out money penalty-free when the money is used for a down payment, but who counts as a first-time homebuyer?  The rules around IRA early withdrawal are complicated. Other than the obvious, you can actually qualify as a first-time homebuyer even if you’ve owned a home before. The IRS rule says that as long as you haven’t had a financial interest in a home in the past two years before the date you’re closing on your new home, you’re technically a first-time homebuyer.  The catch is that you can only withdraw that $10,000 amount once so you cannot use your IRA for every home down payment you may need.

Now you might ask what you can use the money for?  The costs include the cost of buying, building or rebuilding a home, as well as most settlement, financing, and closing costs.  For any of these scenarios, you can use up to $10,000 of your IRA money without paying the 10 percent penalty.

If you start putting some money away into an IRA account you can help yourself get a jump start on at least a portion of the money you will need for a down payment.  A bonus with IRA accounts are the tax benefits.  You can usually get a nice return rate on your savings.  Of course, we advise you to consult with a tax advisor for more detailed information on savings accounts.

The Certo Team
55 N. Arizona Place Suite #103
Chandler, AZ 85225

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