Can You Borrow Against Your IRA to Purchase a Home?
Original post by Mark Kennan of Demand Media
When you purchase a home, between the down payment, closing costs and other expenses, the bills can add up quickly. This may leave you wondering if you can use your IRA for some of the costs. Though some retirement plans, such as 401ks and 403bs, allow loans, IRAs can help in different ways.
All IRAs prohibit taking out loans, even in the case of a home purchase. IRAs also prohibit using the account as collateral for a loan. For example, you could not take out a loan with the promise that if you did not repay it, the lender could take your IRA. If you use your IRA for a loan or as collateral, the IRS treats it like you took all the money out of the account, leaving you responsible for all applicable income taxes and penalties.
Roth IRA Contributions Come Out Tax-Free
With a Roth IRA, you can withdraw your contributions anytime you want without having to pay any income taxes -- contributions to the account cannot be deducted from your income taxes. When you take a distribution, all your contributions come out first. Therefore, as long as your distribution does not exceed the amount of contributions in your Roth IRA, you can avoid all taxes and penalties on the distribution. However, once you take the money out, you cannot put in extra at a future date like you could with a loan.
First-Time Home Buyer Benefits for All IRAs
The IRS offers a special benefit on up to $10,000 taken out of either a traditional IRA or a Roth IRA for a first home purchase. To qualify, you (and your spouse if married) cannot have owned a home in the past two years. If you remove the money from a traditional IRA, you avoid the early withdrawal penalty, but, like all traditional IRA distributions, you must pay income taxes. If you take the distribution from a Roth IRA and have had your account open for at least five years, up to $10,000 comes out as a qualified distribution, meaning no income taxes and no penalties. If your Roth IRA is less than five tax years old, you can still avoid the penalty, but not the income tax on the earnings.
The IRS allows you to perform rollovers, which occur when you take a distribution from a retirement account, such as a IRA, and then replace it, either into the same account or another qualified retirement account, within 60 days. As long as you put the money back in within 60 days, you pay no penalties or taxes. This could be useful in purchasing a home if you are pressed for time in making a deposit on the home, but it will certainly have the money within 60 days, because you can use the IRA money to make the payment and then replace the money in your IRA.
- Internal Revenue Service: Publication 590
- Internal Revenue Service: Retirement Plans FAQs regarding Loans
- Smart Money: Tapping Your IRA Penalty-Free; Ed Slott; July 2010
About the Author
Mark Kennan is a freelance writer specializing in finance-related articles. He has worked as a sports editor for "Ring-Tum Phi" and published articles on a number of online outlets. Kennan holds a Bachelor of Arts in history and politics from Washington and Lee University.
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