Q&A: Using IRA Funds to Purchase a Home Outside the U.S.

I just received an interesting question from a reader that relocated from New York to Denmark in 2003. They have since decided to make the move permanent, and have a question about using IRA funds to help with the purchase of a home overseas:

“Can we withdraw from our traditional IRAs to use as a down payment on a house (we are first time buyers) if that house is in another country? I know that you can do this in the United States, but am curious if we can withdraw the money without penalty if our first time purchase is overseas? Any help would be greatly appreciated!”

Let’s first set aside the issue of whether or not using IRA funds to purchase a house is a good idea. Rather, let’s take a look at the rules…

Ever since the 1997 Taxpayer Relief Act went into effect, people have been able to withdraw up to $10,000 from their traditional or Roth IRA to assist with first-time homebuyer expenses. Moreover, Roth IRA contributions can be withdrawn at any time, and for any reason, so this limit really only applies to earnings in your Roth IRA. Qualified first-time homebuyer withdrawals are potentially subject to taxes (if they represent pre-tax contributions to a traditional IRA), but are otherwise penalty-free.

So what about the issue of doing this overseas? I haven’t actually been able to come up with an authoritative answer. I looked at IRS Publication 590 as well as the instructions for IRS Form 8606 and didn’t see anything the specified where the home has to be. While my knee-jerk reaction would normally be that the home would have to be in the United States, there was a recent discussion on the Get Rich Slowly forums where this topic came up. Here’s the critical bit of the discussion:

“The interesting twist in all this is that your first home can be anywhere in the world. I couldn’t find anything in the code that explicitly addressed this so I called the IRS and spent quite a while on the phone with them; they called me back and said they couldn’t find anything that would prevent my from using my Roth IRA to help my buy my first home in Canada, and the spirit of the law is more to encourage home ownership among Americans rather than specifically for people to buy homes in America.”

Keep in mind that a forum discussion isn’t exactly authoritative when it comes to IRS rules, so… Unless someone around here can provide an authoritative answer (backed up by IRS documentation), I would recommend calling the IRS and verifying this before using those funds.

This article is part of my Money Q&A Series.