Definition:
An Individual Retirement Account (IRA) is a tax-advantaged savings account designed to help individuals save for retirement. In some cases, funds from an IRA can be used to help purchase a home, especially for first-time buyers.
Example:
Emily is buying her first home and needs help with the down payment. She takes $10,000 from her traditional IRA without the early withdrawal penalty, using it to cover part of the upfront costs, as allowed for first-time homebuyers.
Explanation:
IRAs are commonly used to save for retirement and come in two main types: Traditional IRAs (tax-deferred contributions) and Roth IRAs (contributions made with after-tax income). Normally, withdrawing funds before age 59½ results in a 10% early withdrawal penalty. However, there are exceptions when the funds are used for specific purposes, like buying a first home.
Under IRS rules, first-time homebuyers can withdraw up to $10,000 from a Traditional IRA without the early withdrawal penalty, though regular income taxes still apply. Roth IRA contributions (not earnings) can be withdrawn at any time tax and penalty-free, and if the account has been open for at least five years, up to $10,000 of earnings can also be withdrawn penalty-free for a first home purchase.
In this context, a “first-time homebuyer” is defined as someone who hasn’t owned a principal residence in the last two years.
Why is Individual Retirement Account (IRA) Important in Real Estate Transactions?
An IRA can be an important financial tool for buyers who need extra funds for a down payment or closing costs. Knowing this option exists can help first-time buyers access homeownership sooner. For sellers, understanding a buyer’s use of IRA funds shows commitment and financial planning. It’s a lesser-known but useful strategy in real estate finance.