ASK KIM
Unlock Your "First" House with an IRA
by Kimberly Lankford

When I bought my first house, I used an IRA to help make the down payment. I had to sell the place and move to Chicago, where I've rented an apartment for the past few years. I want to buy another house. Can I use my IRA again, even though this isn't really my first house?

Surprise, even if you've owned a home before, you could still be considered a "first-time" home buyer in the eyes of the IRS. The tax code defines a first-time home buyer as someone who hasn't owned a home for the past two years, even if you owned one before then.

For example, if you sold your first home in 2001 and rented since then, you could still withdraw up to $10,000 from a traditional IRA penalty-free to buy or build a home. You'll still owe taxes on your earnings, though. And if you're married, your spouse must also be considered a "first-time" home owner too.

If you have a Roth IRA, you can withdraw your contributions tax- and penalty-free anytime for any reason. You can also withdraw up to $10,000 of your earnings without taxes or penalties for a "first" home if you've held the Roth for at least five years.

In both cases, the $10,000 is per person -- each spouse can withdraw $10,000 from their IRAs for the home purchase. But the $10,000 is a lifetime limit -- so the money you withdrew before counts against the penalty-free money you can withdraw now or again in the future.

But there's a huge downside to raiding your retirement funds for your house. Once you take the money out, it's gone forever. Because your contributions are limited to $3,000 per year ($3,500 if you're over age 50), you can't really pay back more to catch up. That means you lose the ability to have tax-deferred -- or tax-free -- growth for years until retirement.

There are plenty of other ways to buy a home even if you don't have much money saved for a down payment. You could:

• Look for a more affordable house
  
  
• Keep saving. Check out our short-term portfolio for investing ideas if your goal is to buy a house within the next five years.
  
  
• Take out a loan that only requires a small down payment.

Keep in mind that the less you put down now, the larger your payments will be. Run your numbers through our How Much Should I Put Down for a New Home? calculator to make sure the monthly payments will fit into your budget.