Qualified Acquisition Cost

What It Is:

A qualified acquisition cost refers to the cost of buying, building, or rebuilding a home. Investors can often withdraw qualified acquisition costs from their IRAs without paying early withdrawal penalties.

How It Works/Example:

Let's assume George wants to buy a $250,000 house. This is George's first home purchase. In order to make a substantial down payment, he wants to take $15,000 out of his Roth IRA. 

Because George is only 30, he normally cannot withdraw money from his IRA without a hefty penalty. However, because George is using the money for qualified acquisition costs, he can withdraw money from his IRA penalty-free.

In many cases, there is a limit (around $10,000) on the withdrawals allowed under the first-time home buyer provision (for more, visit www.IRS.gov or read 5 Safe Ways to Tap Your Roth IRA Before You Retire). It is important to note, however, that qualified acquisition costs also include settlement and closing costs. 

Why It Matters:

Many investors are unaware that they can tap IRAs to fund first-home purchases. It is especially important to note that "first-time home buyer" does not always mean the buyer can never have owned a home; the term typically refers to people who have not owned a home for several years (for more, visit www.IRS.gov).