Put Money From your IRA Toward a First Home

By Marshall Loeb

RISMEDIA, August 23, 2007—(MarketWatch)—So you want to buy your first home, but no matter what you do you can’t manage to scrape together the cash to make a significant down payment. Or maybe you finally saved enough to buy your starter home, only to realize you don’t have any money left over for repairs.

If you’re in the market for your first home and need a financial leg up, you may want to consider taking money out of your IRA.

Withdrawing cash from an IRA before you turn 59 1/2 typically carries hefty penalties, but the IRS makes an exception for first-time home buyers. You can take up to $10,000 out of your IRA penalty-free as long as you put the money toward building, buying or refurbishing your first home within 120 days of receiving the money. If your spouse also qualifies as a first-time buyer, you can get up to $20,000 to invest in your dream home.

What qualifies as a first home? The definition is more flexible than you might think. A first-time home buyer is anyone who hasn’t held an ownership interest in a main home for the last two years, according to IRS Publication 590.

You can even qualify for the penalty-free withdrawal if you’re not planning to live in the home yourself. The money can be used to buy or restore a house for your children or your spouse’s children, your grandchildren or your spouse’s, or your parents or your spouse’s parents.

This money many not cover your entire down payment or the expense of remodeling in today’s marketplace, but it can be a nice supplement. But be forewarned: you are still responsible for paying income tax on money taken out of your IRA even if you put it towards a first home.

For more information, visit www.irs.gov or talk to your CPA.

Marshall Loeb, former editor of Fortune, Money, and the Columbia Journalism Review, writes for MarketWatch.