Can You Use a Roth Ira to Buy Real Estate?
A Roth IRA is a flexible, versatile investment product that provides many benefits, including the opportunity to purchase a first home without early distribution penalties. The Internal Revenue Service has imposed specific conditions on Roth IRA distributions for buying real estate. The house you buy must be your main place of residence, and you must not have owned another primary home within the past two years.To ensure that you meet the necessary conditions before requesting an early distribution, talk with a financial advisor or a tax professional get quality IRA advice.
If you are at least 59 1/2 or older and you have been making contributions to a Roth IRA for at least 5 years, early distribution requirements do not apply. Once you reach the age of 59 1/2, you can withdraw money from the account to purchase real estate at any time without tax penalties. If you use the funds from your Roth IRA to build or buy a home after retirement age, the "first home" requirement also does not apply.
Buying a First Home
Buying your first house can be one of the most rewarding experiences of a lifetime. While purchasing a home is a dream that many working professionals share, coming up with a substantial down payment can be challenging. The larger the down payment you're able to make, the lower your monthly mortgage payments will be. With a Roth IRA, you can withdraw up to $10,000 without paying the usual 10 percent tax penalty before the age of 59 1/2. [1] This benefit gives you a solid foundation for purchasing your first home.
In order to qualify for a penalty free distribution, the house that you build, buy or rebuild must be a first home. The IRS considers you to be a first time homebuyer if you had no financial interest in a primary place of residence within the two years before the date you acquired the home. This condition also applies to your spouse if you are married. You may take more than one early distribution from a Roth IRA to buy real estate before the age of 59 1/2, but the total distributions cannot exceed $10,000.
Eligible Distributions
The early distribution from a Roth IRA can be used to buy, build or rebuild a main residence. These funds can also be applied to any financing charges or closing costs on the property. The money that you withdraw from your Roth IRA must be used to pay for these costs within 120 days after the date you received the funds. The acquisition date refers to the date you sign a contract to purchase a house or the date you begin construction on a new residence.
If you want to purchase a house for your spouse, child, grandchild, parent or grandparent, you can use your early Roth IRA distribution. As long as your total distributions do not exceed $10,000, you could apply these funds to the purchase of a home for any immediate member of your family. The house you buy must be your family member's primary residence.
Whether you are buying a first primary residence or you're purchasing your second or third home, a Roth IRA can be a flexible financial resource. Consider the eligibility restrictions carefully before you decide to take the early distribution benefit. If you are willing to pay the 10 percent tax penalty, you may make early withdrawals from a Roth IRA to buy real estate that doesn't fit the "first home" requirements. Talk with your tax advisor about the implications of taking early distributions from your Roth IRA.
http://www.irs.gov/publications/p590/ 01/20/2012
Did you Know?
The Roth IRA is a retirement account that is funded with post-tax income. You pay taxes on your income this year as you would during any year and invest the funds in the Roth. Since taxes have been paid before investing you never pay income taxes on those funds in the future.
