Home Buyer Using IRA

If you want to take out your 401(k) or IRA to buy a first-time home, what would be the tax consequences?

The withdrawals are taxable as ordinary income. But if you can qualify for a new tax credit, you may be able to postpone paying the bill.

First the basic rules:
Anyone can take up to $10,000 from an IRA to buy a first home without incurring a 10 percent early-withdrawal penalty, but the money is taxable. You can take taxable withdrawals from 401(k) plan for any reason, if you no longer work for the company that sponsors the plan. If you do, you can only take "hardship withdrawals", for a limited number of reasons. Buying a primary residence is one of them. But "hardship" withdrawals are subject to both tax and early-withdrawal penalty.

A 401(k) loan may be an alternative. What about the tax credit?. The 2008 Housing Act offers a temporary tax credit worth up to $7,500 for people who buy their first home between April 8, 2008 and July 1, 2009. A tax credit cuts your taxes dollar for dollar. However, you must pay the credit back over 15 years, starting the second year after you claim it. It's essentially an interest-free, 15-year loan from Uncle Sam.

To be eligible you cannot have owned a principal residence during the three-year period before the purchase date. And you can't earn too much: The credit phases out for married couples filing jointly whose modified adjusted gross income is between $150,000 and $170,000 a year, and individuals whose modified adjusted gross income is between $75,000 and $95,000.