Q: I've heard that I can withdraw money from my IRA to help pay for my first house. Is this true?
To be perfectly clear, you can withdraw money from your IRA whenever you want. But if you do it without an IRS-allowed exemption, you'll end up paying a 10% early-withdrawal penalty.
Fortunately, for first-time homebuyers, there is such an exemption. First-time homebuyers can take out as much as $10,000 from their traditional IRA penalty-free, although it will still count as taxable income. And if your spouse also has a traditional IRA, they can take out $10,000 as well.
Furthermore, the homebuyer doesn't necessarily have to be you. You can use the money to help your child, grandchild, or parent buy a home as well.
If you have a Roth IRA, you may be able to take out even more. You can always withdraw Roth IRA contributions (but not your earnings) tax- and penalty-free. Plus, you can withdraw up to $10,000 of your earnings under the first-time homebuyer exemption, and if your account has been open for more than five years, the withdrawal will be tax-free.
Also, the IRS has a liberal definition of what a "first-time" homebuyer is. Basically, you must not have owned a principal residence within the last two years. So even if you're not really a first-timer, you may still qualify.
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