What is Qualified Acquisition Cost?

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 Does Qualified Acquisition Cost Work?

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 Does Qualified Acquisition Cost Matter?

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).