Does Taking Money Out of Your IRA to Pay Off Your Home Incur a Tax Penalty?

Acessing IRA funds early often incurs a penalty from the IRS.

Broken Piggy Bank image by Daniel Wiedemann from

Under the best circumstances, retirement planning can be difficult as you attempt to project your future financial needs while balancing the fluctuations of the present market. When other major financial pressures such as the expense of home ownership enter into the equation, retirement planning becomes even more complicated. While most financial planners advise against tapping your traditional individual retirement account for anything but an emergency, in some circumstances you can access it to help pay for a home without incurring a penalty.

First-Time Homebuyer Exemption

If you’re getting ready to buy your first home and have built up money in your IRA, the Internal Revenue Service allows you to access up to $10,000 from it for home expenses, and if you’re married, you and your spouse can both use the exemption to leverage $20,000. Even if you’ve purchased a home before, you may still qualify for the exemption: If neither you nor your spouse has owned a home for the past two years, you qualify for the first-time exemption, even if you owned a home in the past. Don’t take the distribution before you’re getting ready to purchase a home, though, as the IRS only gives you 120 days to place the money back into your home.

Hardship Exemption

If you become disabled and are unable to work, the IRS allows you to tap your IRA without incurring a penalty. This distribution can be used to pay off your home or pay down the loan. To qualify for the disability exemption, you have to be unable to work and have a physician’s certification of your inability to work. Your disability must be permanent, last for an indefinite period or expected to result in your death to qualify for this exemption.

Different Rules From 401(k)s

The IRS allows administrators of a 401(k) plan more leeway in determining hardship distributions, and the different set of rules sometimes confuses investors. If you have a 401(k) through your employer, you may be allowed to make a penalty-free distribution to stave off foreclosure of your home or avoid eviction. That exemption isn’t applied toward IRAs, however, and a foreclosure doesn’t qualify for a penalty-free distribution, so don’t confuse the rules for hardship distributions and inadvertently incur a penalty for an early IRA distribution.

Costs of Early Distributions

If you don’t qualify for an early distribution exemption and still tap your IRA to pay for your home, expect to fork over a large chunk of your distribution to the tax man. The IRS assesses a 10 percent early distribution penalty for all unqualified distributions if you access the money before you turn 59 1/2. Your distribution will also be subject to regular income tax, and if the distribution is large enough, it may push you into a higher tax bracket. If you have a Roth IRA, you have contributed after-tax money, and you can withdraw your contributions at any time without penalty.