Education / First Home Purchase from IRA With Pre-Tax / After-Tax Mix

Submitted by Rob Schmansky on Wed, 2023-06-28 22:45

Hi,

I have a client that has one Rollover IRA that is about 50% pre-tax, 50% after-tax.

Client is 54. The client wants to give $10,000 to one child to buy a first home under the penalty exemption and pay ~$25,000 for education expenses for another child.

This is the only source of liquid funds to make these gifts. I’m curious of how a withdrawal impacts the amounts here.

Example – For the $10,000 first home, can the client only withdraw $10,000 or can they withdraw up to $20,000 if $10,000 is pre-tax/$10,000 is after-tax?

Would either part of these subject either part to the 10% penalty or cause a problem with the $10,000 exemption limit?

I’m hoping the answer is they can do $20,000 because we need money to pay the taxes on the withdrawals.

Same issue for the college and I imagine the answer is the same, but I also wanted to ask that.

Thanks in advance for any guidance!



Submitted by David Mertz on Thu, 2023-06-29 12:51

  • Only the taxable amount from Form 8606 Part I goes on Form 5329 line 1.   Using both exceptions fully, the client could take out a total of $70,000, of which 50%, $35,000, would be taxable.  $25,000 of that would be exempt from penalty by use of the exception for education expenses and $10,000 exempt from penalty by use of the exception for a first-home purchase.  Form 5329 would have $35,000 on line 1, $35,000 on line 2 and code 99 on line 2 indicating that multiple exceptions apply.
  • Since the exception for a first-home purchase has a lifetime limit, using only the education-expense exception, code 08, the client could take out $50,000 without penalty, only $25,000 of which would be taxable.

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