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Using Your Traditional IRA to Buy a Home

May 23, 2012 | Comments: 0 | Views: 247

10% Early Withdrawal Penalty

Generally, when you withdraw funds from a traditional IRA and you are under 59½ years old, you incur a 10% early withdrawal penalty in addition to the income taxes on the amounts withdrawn. However, if you withdraw from your traditional IRA to use the funds to buy a home, then you may be able to avoid the 10% early withdrawal penalty.

Home Buyer Exception

Under 26 USC § 72(t)(2)(F), if you use funds from your traditional IRA to pay for "first-time home distributions", then you do not have to pay the 10% early withdrawal penalty. A "first-time homebuyer distribution" is a distribution from a traditional IRA that is used within 120 days of the withdrawal to pay the costs of acquiring, constructing, or reconstructing a residence (such as the usual or reasonable settlement, financing or other closing costs) for a principal residence of a first-time homebuyer. See 26 USC § 72(t)(8).

Definition of a First-Time Homebuyer

Since this is a government program, a "first-time" homebuyer does not mean what you think it means. A "first-time homebuyer" is an individual (or their spouse) who has not had a present ownership interest in a principal residence in the past two years of "acquiring" a new principal residence. The date of acquisition is either the date of the binding contract to acquire the new principal residence or the date when construction or reconstruction of the new principal residence is commenced. See 26 USC § 72(t)(8)(D).

$10,000 Limit to the Home Buyer Exception

However, there is a limit to how much you can withdraw from your traditional IRA without incurring the 10% early withdrawal penalty. You can only use up to $10,000 in total distributions over your lifetime as qualified first-time homebuyer distributions. See 26 USC § 72(t)(8)(B).

Income Tax Consequences

Although withdrawing from your traditional IRA may not result in the 10% early withdrawal penalty, the withdrawals may still be subject to Federal and state income taxes. The amount of the tax will depend on the total income you receive during the year, such as wages from work, interest and dividends, gains and losses from the sale of capital assets, etc. Before withdrawing from your traditional IRA, you may want to consult with a tax professional to understand the tax consequences.

Laws Subject to Change

Information in this article was based on a review of the U.S. Internal Revenue Code in effect in 2012. Laws are subject to change.

This article was written by Jake C. Santos, Esq., a Senior Associate Attorney, at Norrie & Associates in Mount Olive, NJ. More information about the firm and the author is available at Norrie & Associates serves North and Central New Jersey.

Source: EzineArticles
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