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13 Tax Breaks for Homeowners and Home Buyers | Kiplinger

13 Tax Breaks for Homeowners and Home Buyers | Kiplinger

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Using Retirement Funds for a Down Payment

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13 Tax Breaks for Homeowners and Home Buyers | Kiplinger

Before you can become a homeowner, you have to scrape up enough dough for a down payment. If you have an IRA or a 401(k) account, you might be able to tap into those funds to help you buy a home. Savers with a traditional IRA can withdraw up to $10,000 from the account to buy, build or rebuild a first home without paying the 10% early-withdrawal penalty — even if you're younger than age 59½. If you're married, both you and your spouse can each withdraw $10,000 from separate IRAs without paying the penalty. (To qualify as a first home, you and your spouse cannot have owned a home for the past two years.) However, even though you escape the penalty, you're still required to pay tax on the amount you withdraw.

With a Roth IRA, you can withdraw contributions at any time and for any reason without facing a tax or penalty. The IRS has already taken its cut. You can also withdraw up to $10,000 in earnings before age 59½ to help buy a first home without being hit with the 10% penalty for early withdrawals. (Your spouse can do the same.) If you've had the account for five years, the earnings will be tax-free, too.

If you want to pull money out of a 401(k) account to put toward a down payment, you'll have to borrow from the plan. You can typically take out a tax- and penalty-free loan from your 401(k) plan for up to half of your balance, but not more than $50,000. Money borrowed from a 401(k) usually must be paid back (with interest) within five years, but the repayment period for loans used to purchase a main home can be extended. Be warned, though, that you'll have to repay the loan before your next tax return is due if you leave or lose your job. Otherwise, you'll have to pay taxes on the unpaid balance and a 10% early-withdrawal penalty if you're not yet 55.

(Note that, under the CARES Act, people impacted last year by the coronavirus could borrow more from their 401(k) plan — up to the lesser of $100,000 or 100% of the account balance — until September 23, 2020. They were also given an additional year to repay existing 401(k) loans due between March 27 and December 31, 2020.)