Rules For Withdrawing From Your Retirement Fund for a First-Time Home Purchase

IRAs offer special treatment for first-time home purchase withdrawals.

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Buying a first home often requires more cash than you've got, so you may want to tap your retirement savings. You might be able to withdraw money from your employer plan for a first home purchase, but you won't earn any special tax treatment. With an IRA, you can avoid the early withdrawal penalty, and potentially all taxes, if you qualify as a first-time homebuyer.

Special Treatment

You can exempt from the 10 percent early withdrawal penalty distributions of up to $10,000 over your lifetime from your IRAs that you use for first-time home purchase expenses. For Roth IRAs that you've had open for at least five years, the exemption also applies to income taxes, so you get the $10,000 tax-free and penalty-free. If you're married, both you and your spouse can withdraw $10,000 each from your respective IRAs.

IRA Qualifications

To be a first-time homebuyer, at least for the purposes of qualifying for IRA distribution special treatment, you can't have owned a home for the past two years. If you're married, both you and your spouse have to qualify, even if you're the only one withdrawing the money from an IRA. For example, if your spouse owned a home until one year ago, you don't qualify for the special treatment even if you've never owned a home.

Qualifying Expenses

IRA distributions must be used for qualifying acquisition costs to earn special treatment. These include the costs of buying, building or rebuilding the home as well as financing costs. However, you must pay these costs with the distribution within 120 days of withdrawing the money to qualify. For example, you can spend the money to pay for discount points to lower the interest rate on your mortgage and still qualify.

Employer Plans

Employer plans, such as 401(k) plans and 403(b) plans, may consider purchasing your first home an immediate and heavy financial need if you don't have other money needed to make a down payment or pay closing costs. However, not all plans allow such distributions. In addition, the distribution is not exempt from the 10 percent additional tax on early withdrawals that applies if you're younger than 59-1/2.