Introduced in 1974 with the enactment of the Employee Retirement Income Security Act (ERISA), Individual Retirement Accounts (IRAs) are retirement plans in which money is stored in annuities for long-term savings. In its original form, taxpayers could contribute a maximum of $1,500 of their income per year to this annuity. At the present day, the annual contribution limit is $5,500

The upside to IRAs is that the contributions to these retirement plans are untaxed, thus they are widely viewed as a great way to store money for retirement.
funds from ira for down payment
The downside is that they can be problematic in the short term. If you end up in an unfortunate situation in which you need access to money, breaking into an IRA is a difficult decision. Not only will an IRA distribution be subject to state and federal taxes, but if you are under the age of 59.5, you can be slapped with a 10% early distribution penalty.

The penalties were put in place by the Internal Revenue Service (IRS) to discourage people from digging into their IRAs pre-retirement for reasons other than costs associated with retirement.

IRA Penalty Exemption

That being said, the IRS does have a short list of exceptions, or situations, in which you can draw from your IRA accounts without facing harsh penalties.

These situations include paying medicals bills and insurance, situations of disability, calls to active duty among military service men and women, paying for higher education for oneself or a family member, and more related to the topic here, home purchases for first-time homebuyers.

Here’s how it works. For any individual who is buying, building, or rebuilding their first home, you have the opportunity to distribute $10,000 from your IRA if the money will be used towards expenses related to the home, including closing costs. Similar to some of the previously mentioned deductions, the status of being a first-time homebuyer means that the homebuyer must not have owned a home with the last two years.

One of the useful perks of IRA Penalty Exemption is that unlike many other deductions, spouses can contribute an additional, equal amount, as opposed to a split share.

For example: A husband and wife both have IRAs, and they would like to use some of their retirement money to pay for a new home. Instead of the $10,000 amount being a combined amount they can both contribute $5,000 towards, they are both able to distribute $10,000 from their respective accounts, thus combining for a total of $20,000. There is a downside to this, however, as the $10,000 is a lifetime limit.

Be sure to talk to your financial advisor before withdrawing any money from your accounts as Traditional IRAs and Roth IRAs are treated differently and there are time limits placed on how quickly money distributed from an account must be used to fund a home purchase.

If you think you’re ready to start the home buying process in Peoria give me a call at (602) 456-2195 or apply online today!

Skyline Financial Corp. and its loan officers are not financial advisors. Always consult a financial professional for details.

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    David Krushinsky

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