Family Wants to Tap IRA to Buy First Home

By Retirement Bankrate.com

Homes along Clearview Drive that are priced between $594,000 and $899,000, according to real estate database Zillow, are seen in Los Gatos, California September 6, 2012. For decades, the government-backed programs that currently support Santa Clara's housing market aimed to help the country's blue collar and middle-class workers achieve the dream of home ownership. But five years after the collapse of a housing bubble, they now underpin almost every new mortgage taken out in the country, including those for four-bedroom houses in Silicon Valley that go for $600,000. The pervasiveness of the government in the nation's housing finance system - even in wealthy areas - is a sign of how dysfunctional the mortgage industry remains. Picture taken September 6. To match Special Report FANFRED/LENDING        REUTERS/Norbert von der Groeben (UNITED STATES - Tags: BUSINESS POLITICS REAL ESTATE SOCIETY) - RTR37X0B

Homes along Clearview Drive that are priced between $594,000 and $899,000, according to real estate database Zillow, are seen in Los Gatos, California September 6, 2012. For decades, the government-backed programs that currently support Santa Clara's ... housing market aimed to help the country's blue collar and middle-class workers achieve the dream of home ownership. But five years after the collapse of a housing bubble, they now underpin almost every new mortgage taken out in the country, including those for four-bedroom houses in Silicon Valley that go for $600,000. The pervasiveness of the government in the nation's housing finance system - even in wealthy areas - is a sign of how dysfunctional the mortgage industry remains. Picture taken September 6. To match Special Report FANFRED/LENDING REUTERS/Norbert von der Groeben (UNITED STATES - Tags: BUSINESS POLITICS REAL ESTATE SOCIETY) - RTR37X0B (Reuters)

Dear Dr. Don, 

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We have a 7-year-old special needs child who requires our constant care and we expect this will always be the case.

We currently rent a two-floor home, but it is becoming increasingly difficult to move up and down stairs with our child. We would like to move into a single-level home. It's not easy to find a rental in our area, although there are some one-story homes on the market. We don't have savings for a down payment, but we do have money in an individual retirement account. Is there a program or tax break that would allow us to use the IRA money for a down payment, or would we get whacked by the IRS?

Thanks, 

- Richard Rancher

Dear Richard, 

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When you make tax-deferred contributions to an IRA, the money will be taxed when you take it out. That's something quite different from getting "whacked" by the IRS.

You can't avoid the income taxes, but you should be able to avoid the 10% penalty tax. That's because taking an early distribution as a first-time homebuyer is one of the exceptions to the penalty tax. You can receive distributions of up to $10,000 from your IRA for a first home without being exposed to the penalty tax.

Despite the name of the exception, it doesn't necessarily have to be your first home for you to qualify as a first-time homebuyer. From IRS Publication 590, "Generally, you are a first-time homebuyer if you had no present interest in a main home during the two-year period ending on the date of acquisition of the home which the distribution is being used to buy, build or rebuild. If you are married, your spouse must also meet this no-ownership requirement."

As to loan or down payment programs for parents of a special needs child, your best source of information might be the state or local housing authority. I suggest beginning there because a down payment assistance program would allow you to keep more retirement money working for you in an IRA while buying the house you want for your family.

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