If you need some extra cash to make a down payment on a home, the money in your individual retirement account can look awfully tempting. Though the Internal Revenue Service permits you to raid your IRA at any time, you may have to pay extra in taxes and penalties if you take the money out. The only way to get special treatment is if you qualify as a first-time home buyer.
First-Time Home Buyer Definition
To qualify as a first-time home buyer, you cannot have owned a home within the past two years. If you're married, your spouse has to also meet this requirement; otherwise neither of you qualify. However, if you both qualify, each spouse can take out up to $10,000 and qualify for the first-time home buyer exception, for a total of $20,000.
If you're taking money out of a traditional IRA, you won't be able to take a qualified distribution. A qualified distribution from a traditional IRA is any distribution taken after you turn 59 1/2. It counts as taxable income, but isn't penalized. Since you're not old enough to take a qualified distribution, the entire distribution is not only taxable, but also subject to the 10 percent early withdrawal penalty unless you qualify for the first-time home buyer exception. If you're not a first-time home buyer, your traditional IRA distribution won't get any special treatment.
Unlike with a traditional IRA, you might be able to take part or all of your distribution as a qualified withdrawal from a Roth IRA. Qualified distributions from Roth IRAs mean that at least five years have passed since January 1 of the first year you made a Roth IRA contribution, and either you're 59 1/2 years old, permanently disabled, or you're a first-time home buyer withdrawing up to $10,000 for home acquisition costs, including your mortgage down payment.
Any distribution that doesn't meet the requirements for a qualified distribution is a non-qualified distribution. If you're taking a non-qualified distribution, you can withdraw your contributions in your Roth IRA at any time, include for a mortgage down payment, without taxes or penalties. You'll only owe taxes if you withdraw earnings from your Roth IRA in a non-qualified distribution. However, if you take a non-qualified distribution of earnings, you can at least avoid the penalty on up to $10,000 if you qualify as a first-time home buyer.
To use the exception, you must use the money for "qualified acquisition costs" within 120 days of taking the distribution. These costs include not only the down payment, but also the settlement and financing charges. If you don't make the payment in time, you aren't allowed the special benefits of a first-time home buyer distribution. However, you are allowed to use the exception to pay for a first home for your spouse, parents, children or grandchildren as long as that person qualifies as a first-time home buyer. Also, the $10,000 is a lifetime limit, which means that if you use $6,000 on your own home, you couldn't apply the exception to more than $4,000 to buy your parents their first home.
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."