Do SIMPLE IRAs qualify for the waiver of tax penalty for new home
If a SIMPLE IRA owner has had the SIMPLE in place for more than 2 years, will they be able to waive the 10% penalty if they use the funds to purchase a new home.
And how much does the 10% penalty waiver apply to? Say the withdrawal is 15k, how much of that would avoid the 10% penalty? My understanding is only 10K will avoid the penalty for purchase of a new home.
Thanks for your help.
Permalink Submitted by Jose Morales on Fri, 2015-07-31 18:12
Premature distributions from a SIMPLE IRA within the first two years are subject to a 25% tax penalty, after the two year period it lowers to 10%, however there is a waiver of the premature distribution penalty on SIMPLE IRA distributions for qualified first time home buyers up to $10,000.
Permalink Submitted by Alan - IRA critic on Fri, 2015-07-31 19:16
This question is interesting with respect to such a distribution IF taken in the first two years. While the first home penalty waiver up to 10k will waive the 25% penalty just as it would the 10% penalty after two years, there is a unique provision with respect to a first home distribution when the purchase falls apart. There is a 120 period to roll the funds back into an IRA if this happens, but Notice 98-4 indicates that a rollover can only be made to ANOTHER Simple IRA in the first two years. The distribution cannot be rolled into a TIRA or Roth IRA or back to the distributing SIMPLE account. And you cannot establish what is known as a “transfer SIMPLE IRA” account elsewhere to receive the rollover because a transfer SIMPLE can only receive a direct trustee transfer. Therefore, if the deal falls through and you do not have a first home purchase, you also do not have a home for the distribution. That will make it taxable and subject to the 25% penalty. For this reason it is inadvisable to consider a SIMPLE IRA distribution for a first home until the 2 year waiting period has been satisfied.
Permalink Submitted by David Mertz on Sat, 2015-08-01 00:52
And note that the exception applies only to an IRA distribution used to pay qualifed acquisitions costs of a first home, not just any new home.