With the much stricter loan qualification standards in effect today compared to times past, borrowers are often required to put down at least 20 percent of the purchase price to obtain a home loan. There are lots of people who would like to purchase a home in these times of low interest rates but can’t come up with the down payment.

Fortunately, first-time homebuyers who have IRAs (individual retirement accounts) may have more money available for a down payment than they realize. Ordinarily, the money in an IRA can’t be withdrawn before age 59.5 without incurring a 10 percent income tax penalty.

CORRECTION: The original version of this column contained an error that has been corrected. For the purposes of individual retirement accounts, individuals are considered first-time homebuyers if the individual or the individual’s spouse did not own a principal residence at any time during the previous two years.

With the much stricter loan qualification standards in effect today compared to times past, borrowers are often required to put down at least 20 percent of the purchase price to obtain a home loan. There are lots of people who would like to purchase a home in these times of low interest rates but can’t come up with the down payment.

Fortunately, first-time homebuyers who have IRAs (individual retirement accounts) may have more money available for a down payment than they realize. Ordinarily, the money in an IRA can’t be withdrawn before age 59.5 without incurring a 10 percent income tax penalty.

However, there is a special exemption for first-time homebuyers. They can withdraw up to $10,000 in IRA funds to purchase a first home without paying the penalty. A married couple can each withdraw $10,000, giving a total of $20,000.

Are taxes due on the withdrawal?

Whenever money is withdrawn from a traditional IRA, it must be reported as income and regular income tax paid on it. This applies to withdrawals for buying a first home. However, this rule does not apply to Roth IRAs.

Like traditional IRAs, Roth IRAs are tax deferred. Unlike traditional IRAs, however, contributions to Roth IRAs are not tax deductible. Instead, withdrawals are tax free after age 59.5.

So long as the Roth IRA has been in existence for at least five years, withdrawals up to $10,000 for a first-time home purchase are completely tax free — neither income tax nor a penalty tax need be paid.

However, if the Roth IRA is less than 5 years old, income taxes may have to be paid on the withdrawal, but no penalty tax.

Who is a first-time homebuyer?

The good news is that a person can qualify as a first-time homebuyer for these purposes even if he or she has owned homes in the past. For IRA purposes, you’re a first-time homebuyer so long as you, or your spouse, did not own a principal residence at any time during the previous two years.

The two years are measured from the time the new home is acquired. This is the date a binding sales contract is signed or building or rebuilding has begun.

What can the money be used for?

The IRA withdrawal can be used to help pay for any costs involved in buying, building, or rebuilding a home. It may also be used for reasonable settlement, financing, or other closing costs.

Moreover, the money can be given to a child, grandchild, parent, or other ancestor to buy a first home so long as that individual qualifies under the rules.

The money must be used to pay these costs within 120 days after it is withdrawn from the IRA account. If the home purchase is canceled or delayed, no taxes will be due so long as the money is put back into the account within 120 days of its withdrawal.

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