Can You Use IRA Assets to Purchase a Retirement Home? Should You?
Dear Carrie: My wife and I are both over 63 and want to purchase a primary residence for our retirement. Can we use money from our individual retirement account for the down payment? If so, are there any tax issues? -- A Reader
Dear Reader: It's great that you and your wife are thinking ahead about where you'll live in retirement. We often focus on how much money it will take to retire comfortably, but where you'll actually call home in retirement is something a lot of people don't consider in advance. And I'm happy that you bring up the possibility of using some of your IRA assets for a down payment, as it raises a lot of related issues you'll also want to think about now.
But first, let's talk about IRA rules because it seems from your question that you may be thinking about exemptions for first-time home buyers that are really only pertinent for folks under age 59 1/2.
How the Homebuyer Exemption Works
As you're probably aware, taking a distribution from an IRA before age 59 1/2 triggers both income taxes and a 10% penalty. There are a few exceptions that allow you to avoid the penalty, and one of those is using IRA money for the purchase of a first home.
Interestingly, the definition of "first home" goes beyond your very first purchase. It also applies if you haven't owned a principal residence at any time in the past two years. The catch is that the maximum penalty-free withdrawal from an IRA under the homebuyer exemption is a lifetime limit of $10,000 -- which doesn't go very far in many housing markets these days. However, the $10,000 limit applies to the IRA owner, so if you and your spouse each had an IRA, each of you could withdraw $10,000 from your own IRA as first-time homebuyers without incurring the 10% early withdrawal penalty.
Because you and your wife are both 63, this exemption isn't relevant or necessary. At your age, you can withdraw any amount from your IRA penalty-free. For you, the issues are taxes and overall financial planning.
Taxes You May Have to Pay
When it comes to using IRA money for a home purchase, there's no exemption from income taxes. So whether or not you'll have to pay taxes on a distribution -- for any reason -- depends on the type of IRA you have.
With a traditional, deductible IRA, withdrawals are subject to ordinary income tax no matter what. So let's say you withdraw $50,000 from your traditional, deductible IRA for a down payment. That $50,000 would be added to your taxable income for the year.