Home Buyers May Get Boost from IRA Funds

It's not easy to put away a little nest egg. When your egg is ready to hatch, you should be able to use your savings for whatever you want, right? Not when it comes to your individual retirement account--you can't borrow from your IRA funds to buy a house without paying taxes. Hello, does anyone care about first-time home buyers? Fortunately, yes, some congressmen are banding together to lift the tax requirement, at least for loans to help a family member buy a home.

Out of concerns that wheeler-dealers might use their tax-deferred IRA savings for risky investment schemes, Congress some time ago placed two restrictions on IRA withdrawals: 1 - You pay a 10 percent penalty for withdrawing funds before age 59 1/2, and 2 - You pay income taxes at your regular rate on whatever you withdraw. It seems reasonable until you compare IRAs with employer-sponsored 401k retirement plans or the government's own employee retirement plan--both allow penalty-free, early withdrawals up to a certain specified amount, but not IRAs.

Fortunately, Congress is gradually waking up to the problem. In 1997 it passed legislation that allows IRA holders to remove funds up to $10,000 for home buying purposes without paying the 10 percent penalty. But that only solved half the problem. Few people are going to withdraw IRA funds if they still have to pay taxes on them. Do the math--you pay $2,800 if you're in a 28 percent tax bracket. That leaves only $7,200 for your son, daughter or grandchild's down payment or closing costs.

This year, however, Congress is moving toward dropping the tax restriction, too. Congressman John LeFalce (D-NY) has introduced H.R. 1333, the "First-time Homebuyer Affordability Act." Under the bill, anyone can make a first-time homebuyer loan to a child, grandchild, spouse or grandparent using up to $10,000 in IRA funds--without the 10 percent penalty or income taxes. A first-time homebuyer is defined as someone who hasn't owned a principal residence for 24 months. There are some caveats involved, including a ban on outright gifts--you must loan the money and charge interest. The proposed loan terms are quite favorable, however, your family member can take up to 15 years to pay it off on an interest-only basis. Remaining principal would be due either when the house is sold or at the end of the loan term.

Sources used to create this article include writer Kenneth R. Harney and The Washington Post.