As one of the largest purchases you will probably ever make, buying a home often requires that you tap any available source of cash. If you have been saving for any length of time in a traditional IRA, you may wish to borrow the money from this account to help. Unfortunately, you cannot borrow from an IRA account. You may have other options, however, which allow you to use IRA funds to help with your home purchase.
Internal Revenue Service code specifically prohibits you from borrowing money from an IRA account. This includes using the account as collateral for a loan. If you borrow from your IRA, any amount that you borrow is treated as a distribution, or withdrawal. If you use your account as collateral for a loan, the entire balance of the account is considered distributed. These distributions are subject to any taxes and penalties that may apply for early distributions.
Withdrawal for Home Purchase
You are allowed to take a withdrawal from your IRA account to make a first-time home purchase. The IRS defines first-time purchase as buying a home when you have not had an ownership interest in your primary residence for the last two years. You can withdraw up to $10,000 over your lifetime from a traditional IRA to purchase a home, without penalty. However, you need to pay the taxes on this money as regular income.
If your need for money is short-term, you can take advantage of the tax-free rollover provisions in the IRA laws. You can withdraw money from your IRA account, and not pay any taxes or penalties on the money you as long as the money is put back into the same IRA, or another IRA of the same type, within 60 days. You can use that money for any purpose during that time period.
You can also withdraw money from your Roth IRA for a home purchase. You can withdraw Roth contributions anytime without taxes or penalties, and the earnings are tax-free in retirement. You can withdraw Roth earnings tax and penalty-free for a first-time home purchase if your account has been open for at least five years. If your account has not been open that long, the you will pay taxes on the earnings you withdraw, but you will not owe the usual 10 percent tax penalty.