Traditional IRAs can give you a tax break and grow tax-deferred. Roth IRAs are funded by after-tax money and grow tax-free. Along with your 401(k), IRAs will likely constitute the bulk of your retirement savings. But IRAs can also be used for non-retirement purposes. If you’re buying your first home or paying for college, you can take a distribution from your IRAs without the usual 10% early withdrawal penalty.
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Using IRA to Buy Your First Home
You can withdraw up to $10,000 from your IRA for the purchase of a first home. If you’re married, you can each take $10,000 out of your individual accounts for a total of $20,000. And this rule is very flexible:
- First home can be “first” for either you or your spouse.
- The purchase also qualifies if you haven’t own a home at any time during the previous two years.
- In fact, the rule even extends to your children, grandchildren, and parents.
Using IRA to Pay For School
When it comes to school costs, no penalty will be assessed as long as your IRA money goes toward qualified schooling costs for yourself, your spouse or your children or grandchildren. This means the withdrawal must be used for tuition and school fees. Moreover, the school has to be IRS approved institution — this is any college, university, vocational school or other post-secondary facility that meets federal student aid program requirements.
Roth IRA Early Withdrawal
Since Roth IRAs are taxed differently than traditional IRAs, the rules for a qualified distribution are a little different. With a Roth IRA, you can always withdraw your original contribution completely tax-free as long as you have had the Roth for five years or more.
In the end, you should really try to avoid using your IRA savings for anything other than retirement, but it’s nice to know you have that money for certain life events if absolutely necessary.
Andy is a 30-something New Yorker who turned his financial life around. He took charge of his finances, got out of debt, and is now working his way toward financial success. He is the owner and publisher of WorkSaveLive.com.