If you're trying to figure out how to come up with more funds for buying your first home, an IRA distribution might help if you qualify as a first-time home buyer. If you meet the requirements, qualifying expenses include the cost to buy the home, as well as the costs of financing your home, such as closing fees.
First-Time Home Buyer Defined
For the purposes of distributions from IRAs, the Internal Revenue Service defines a first-time home buyer as someone who hasn't owned a home in the two years prior to the date of purchase of the home. For example, if you owned a home but sold it five years ago and have been renting ever since, you qualify as a first-time home buyer. If you're married, both you and your spouse must satisfy the test for either to qualify. For example, if your spouse owns a home but you don't, you don't qualify even if you've never owned a home.
The special treatment for IRA distributions for first-time home purchases applies to a maximum of $10,000 over your lifetime. However, the first-time home buyer doesn't have to be you. Instead, you can take a distribution for your grandparents, parents, children or grandchildren. For example, if you withdraw $7,000 to buy your own first home, you could use $3,000 to take a first-time distribution for your son later on.
Traditional IRA Distributions
If you take a distribution from a traditional IRA for use in buying your first home, the exemption exempts you from paying the 10 percent additional tax penalty on early distributions. You will have to pay income taxes on the distribution. For example, if you take a $10,000 distribution to buy your first home and you fall in the 25 percent tax bracket, you'll still owe $2,500 in taxes but you won't owe the $1,000 early withdrawal penalty.
Roth IRA Distributions
With a Roth IRA, you also exempt your distribution from any 10 percent early withdrawal penalty you might owe on your distribution. However, if you've had your Roth IRA open for at least five tax years before you take the distribution, the withdrawal counts as a "qualified distribution" so the entire amount is tax-free as well. "Tax years" count from Jan. 1 of the first tax year that you made your contribution.
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."