IRA Distribution Exception for First-Time Home Buyers

A one-time, penalty-free IRA distribution exceptionIRA 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.

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Exceptions to the 10% Early IRA Distribution Penalty

Exceptions to the IRA penalty fall into 2 categories

Just for IRAsIRA distribution penalty

First-Time Home Purchase

The 10% early IRA distribution penalty does not apply if you use the distribution to acquire a first home. Acquire means purchasing an existing home or constructing a new one for a primary residence. Closing costs also qualify. The definition of first-time home buyer is someone who has not owned a home for the past two years.

Higher Education

The 10% IRA distribution penalty does not apply if you take an IRA distribution and use it for qualified higher education expenses. Such expenses include post-secondary tuition, fees, books, supplies and required equipment. Computers, computer equipment and internet access are qualified education expenses if used by the students during the years which they are in school.

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Avoiding the 10% Early IRA Distribution Penalty in 5 Easy Steps

What is the 10% early IRA distribution penalty?

Early IRA PenaltiesA 10% early IRA distribution penalty applies to taxable distributions made before age 59 ½. Distributions made after age 59 ½ are not subject to the 10% early distribution penalty.

Exceptions: Age 55 for employer plans when you separate from service in the year you turn 55 or later; age 50 for public safety employees in governmental defined benefit plans who separate from service; for SIMPLE IRAs, the penalty is 25% for the first two years in the plan, then reverts back to the 10% penalty in following years.

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