Ask a Fool: Can I Use My IRA to Help My Child Buy a Home?

There's an early-withdrawal exception for first-time home purchases, but there are a few things you should know first.

Matthew Frankel, CFP
Matthew Frankel, CFP
Feb 15, 2019 at 12:00PM
Investment Planning

Q: My son is buying his first home and I'd like to help him out. I'm only 55, but someone told me that I may be able to tap into my IRA to help with the down payment. How does this work?

There is an exception to the IRA early-withdrawal penalty for first-time homebuyers, but there are a few things that you should know.

First, the withdrawal can be taken for pretty much any relative you want, so helping out your son with his first home purchase is fair game.

Second, although it doesn't apply to you, it's worth pointing out that the home in question doesn't even necessarily need to be the buyer's first home. The IRS defines a "first-time homebuyer" as someone who hasn't owned a home in the past two years.

Third, while you won't get hit with the IRS' 10% penalty on a qualified first-time homebuyer withdrawal, it's important to realize that if the withdrawal came from any traditional IRA or from investment earnings from a Roth IRA that has been open for fewer than five years, it can still be considered taxable income. For example, if you withdraw $5,000 from your traditional IRA and you're in the 22% tax bracket, be prepared for the $1,100 tax hit it will cause.

Finally, the maximum you can withdraw from your IRA for a first-time home purchase is $10,000, and this is a lifetime maximum. In other words, if you withdraw $10,000 from your IRA for your son's home purchase, you'll never be able to use this exception again.