A one-time, penalty-free IRA distribution exception
You’ve worked hard to put money in an IRA preparing for retirement. For many people, your IRA savings may be your largest asset. If you’re looking to purchase a home, you may need to access your IRA funds to assist with the costs. There is an IRA distribution exception in the tax code that can help you.
The First-Time Home Buyers Exception
If you take a distribution from your IRA and have not reached the age of 59 1/2, you will not only have to pay the taxes on the funds, but also pay a 10% early distribution penalty. However, there is an exception for first-time home buyers. If you’re looking to buy or build a principal residence and you are a first-time home buyer, the 10% penalty does not apply to your IR distribution. The funds can also be used to pay for the settlement fees, closing costs, and financing fees.
The First-Time Home Buyer
A first-time home buyer is considered anyone that hasn’t owned a house in the past two years. This applies to you and your spouse. IRA funds may also be used to help a family member to purchase a house if they meet the first-time home buyer definition.
There’s a lifetime limit
There is a $10,000 lifetime limit on penalty-free distributions that can be used for a first-time home purchase. If both you and your spouse each have IRAs and qualify as first-time home buyers, you may each take a $10,000 distribution for the same home purchase. Taking funds above $10,000 will not be exempt from the 10% penalty. Once you use your $10,000 lifetime limit, it’s gone forever.
120 Day Time Frame
The distribution must be used within a 120-day time frame from the day it is receive to purchase your first home. If you purchase happens to be delayed, you can roll the funds back into your IRA. You have 120 days from the date of the distribution to do this rather than the 60-day period which is the normal deadline for rolling over IRA distributions.
Claiming the Exception
Your IRA distribution will be taxable to you, unless you have basis included in the distribution. This tax break only gets you out of the 10% early distribution penalty. Your IRA custodian will likely report the distribution as an early distribution to both you and the IRS. You will want to claim the exception to the 10% early distribution penalty when you file your tax return for the year. As with all tax matters, you will want to keep good records in case the IRS decides to ask questions.