Cash out Traditional IRA for down payment?

[LouGreen]

Hi all!

We are closing on our first house at the end of the month. I thought I remembered reading somewhere that I can cash out my IRA without penalty if I use it for a first-time home. I have $2k in a Vanguard traditional IRA that I rolled over from an old 401k plan that I'd like to use. Can someone verify if this can be done?

Thanks!

[ooeei]

You can do it, but there are a few things to be aware of:

1.  You will pay taxes on whatever you take out at your marginal tax rate.  Assuming you're in the 25% tax bracket, $500 goes to Uncle Sam.

2.  You must use the funds within 120 days of withdrawing them, or you will pay a 10% penalty on the funds.  Make the withdrawal at the last possible second to ensure you use the funds in time.

3.  That is money you can never put back into a tax sheltered account.  If you only have $2000 in your IRA and need it for a home purchase, I'm not sure you're ready to buy a home.  Do you have an emergency fund?  Extra savings somewhere in a taxable account?  Any other retirement savings?  Houses are expensive, and taking tax deferred money from your future self to pay for one is a questionable way to start off.

[LouGreen]

Thanks!

Yep, I have 6 months of an ER fund, 20k in VTSAX, and a hefty good chunk in my retirement accts (401k and SEP-IRA). I don't need the 2k for the house, just wanted to think through all my options!

[MoonShadow]

You can withdraw up to $10K from your tIRA, or any IRA, exactly once in your lifetime; but it must be for a "first time homebuyer", which can either mean that it is actually the first home you have ever bought, or you haven't owned any real estate property in the past 2+ tax years; depending upon who you ask (IANAL).  Either way, if you have owned a home in the past 2 years and you try to do this, you will end up with a 10% penalty.  If you ever try to do this again, in order to get the other $8K, you will end up paying a 10% penalty.

Don't do this.