Qualified IRA Distributions for homebuyers
My wife and I are purchasing a home. It is our understanding that you may use up to $10,000 from your IRA without facing any penalties for first time homebuyers.
My questions are the following:
1) What does the government consider first time homebuyers? (We purchased a home in 2003 but were unaware of this rule. Was it available then? Does the government still allow us to use it if we are buying our second home? Please note that we have sold our first home and are currently renting.
2) If the government will not allow us to make the withdrawal without penalty are there any loopholes around the issue? For example, could we purchase the home in a trust and would it than be considered a first home?
3) Is that $10,000 qualified distribution apply to both spouses? Would we be able to take $10,000 from each spouses IRA?
4) Do the rules differentiate amongst category of account? For example we both have IRA’s, 401K’s, 403B’s and Deferred Compensation plans.
Thank you.
Permalink Submitted by Alan Spross on Sat, 2007-12-29 21:24
1) Yes, it was available then, but it is too late to apply it to 2003. Since it is a lifetime limit per person, you still may be able to use it if you purchase another main home. The exception does not apply to secondary homes, only your primary residence. You are again considered a first time homebuyer if you have not owned a main home in the 24 months before you close on another main home. In other words, 24 months must pass from the time you sold the prior main home until you purchase another, therefore, you may be still be able to apply this exception in the future.
2) Not applicable. If you purchase a new home and title it to a revocable living trust, you can still use the exception, but the 24 month rule still applies regardless whether you title the home in your name or your living trust.
3) Yes, providing you are both on title.
4) The exception ONLY applies to IRAs. Many people mistakenly think 401k distributions qualify, but they do not. You can use the exception with a Roth IRA, but the rules are very tricky with a Roth, probably better to use a traditional IRA if you can afford the regular taxes on the distribution. While the distribution would still be taxable, you would have mortgage interest and property tax deductions if you can itemize that would offset some of the taxable income.
You claim the exception on your return using Form 5329, because the IRA custodian will still code the distribution as “early”.
If the deal falls through, you have 120 days to roll the funds back into the IRA instead of the usual 60 days.
Permalink Submitted by Roger Kendrick on Sun, 2007-12-30 05:04
Thank you. Your information was very helpful!