Keeping an IRA is one of the smartest things that you can do for your future. Essentially, an IRA allows you to make investment gains over time that are tax free; once you withdraw your money at retirement age, any qualified withdrawals are also tax free.
The downside to an IRA, however, is that if you withdraw your money before retirement age, there is a penalty from the IRS: 10 percent. However, there are some exceptions to this, including the first-time homebuyer exception, which you should be aware of.
How Much Money You Can Withdraw from Your IRA without Being Penalized
If you are a first-time homebuyer, you are allowed to make a withdrawal from your IRA for the purpose of helping you with your down payment. Your spouse can also qualify (separately) for this exception. The maximum amount of money that one person is able to withdraw from their IRA for the purpose of buying a home for the first time is $10,000. This withdrawal is penalty free.
Without Penalties, but Not without Taxes
Keep in mind that the $10,000 withdrawal may be excluded from the traditional 10 percent tax penalty that is levied by the IRS, but it may not tax free. To be sure, your withdrawal may be taxed as income, which means that whatever income tax rate you are subject to, you may need to pay this tax on your withdrawal. So, if you currently pay taxes at a rate of 20 percent, you will only really be able to use 80 percent, or $8,000, of the $10,000 withdrawal.
Should I Withdraw from My IRA if I’m a First-time Homebuyer?
While withdrawing money from your IRA to help you buy, build, or rebuild a home may sound like a great idea, especially if you are in a pinch financially, you may want to consider meeting with a financial professional before you make any moves. As explained by Schwab, this is because the short-term benefit may not really make up for the long term loss. For example, $10,000 isn’t a huge amount of money (especially when speaking about a 20 percent downpayment on a home). Further, remember that the $10,000 will be reduced by a percentage that is dependent on your tax bracket. This may mean that you are only left between $7,000 and $8,000, which is a far lesser amount than is required for most downpayments.
Further, the long-term losses may be great. When you take money out of your IRA (especially without a plan to immediately replace it), you are losing out on the benefit of tax-free growth on that money over time.
What Should I Do?
Luckily, there are some homebuying options that do not require having a down payment, or a large down payment at that. Further, there may be some situations in which withdrawing from your IRA is smart. The best thing to do is to weigh your options and consult with a professional.
At Hayden Homes, we know how to help you navigate through the challenges of securing financing for a new home. We work with a number of preferred lenders – if you have questions, contact us today in the Northwest to learn more about how we can simplify the financing process so that you can buy your dream home. We serve clients in Idaho, Oregon, and Washington, and we are happy to answer any questions you may have. Contact us today!
About Hayden Homes
Hayden Homes provides high-quality, value-driven homes throughout Oregon, Washington and Idaho. Established in Redmond, Oregon in 1989, Hayden Homes has built more than 14,000 homes in over 300 new home communities. Hayden Homes continues to be the largest privately owned new home builder in the Pacific Northwest.
With a commitment to building strong communities together, Hayden Homes has contributed 2.5 billion dollars to local economies and creates more than 5500 jobs annually. Hayden Homes supports philanthropic efforts in the communities in which they build and have contributed more than 13.3 million dollars in charitable donations with the flagship of their giving through the 501C3 Non-Profit, First Story. To date, First Story has provided 69 work-force families throughout the Pacific Northwest with an affordable home ownership opportunity and a first step toward financial freedom. The Hayden Homes brand family of companies includes Simplicity by Hayden Homes, Wise Size Homes and Hayden Homes, all providing an unparalleled selection of opportunities for those looking to purchase a new home in Sisters, Bend, or Redmond, Oregon.