IRA Tax Law as it relates to first time home buyers

[dmaruski]

What is the name of your state?
Pennsylvania

I am starting the process of looking for a home and I am a first time home buyer. I have heard about five different answers in regard to my question but none from an accountant or lawyer. I believe I have a traditional IRA. It was rolled over from a 401K plan I had at a previous employer after I was laid off.

What are my options/consequences for taking money out of that IRA to pay the closing costs and other necessities (one year home owners ins., etc) for getting a home?

Regards,
Derrek

[tranquility]

I'm assuming you are under 59 1/2.

Per Code Sec. 72(t)(2)(F), a first-time homebuyer (as described) does not have to pay a 10% penalty on the early withdrawal of funds from a traditional IRA. (Up to $10,000 of withdrawal in one's lifetime.) You will, of course, have to pay income tax on the withdrawal.

I don't know if state or local taxes on the distribution would also apply. Not all are unified with the federal rules.

[abezon]

You can withdraw up to $10,000 or the amount of your closing costs, whichever is less. You don't have to actually apply the withdrawal to the closing costs, but they do limit your penalty-free withdrawal.

[tranquility]

"You don't have to actually apply the withdrawal to the closing costs, but they do limit your penalty-free withdrawal."

Is this new this year? I only see a $10,000 limitation.

[LdiJ]

Originally Posted by tranquility

"You don't have to actually apply the withdrawal to the closing costs, but they do limit your penalty-free withdrawal."

Is this new this year? I only see a $10,000 limitation.

I am certain that the penalty free withdrawal is limited to the actual amount of the down payment plus costs...or 10, 000 whichever is lower.

[efflandt]

It is not limited just to closing costs, but can include down payment, construction costs, etc. And if a spouse has an IRA they can also take a distribution with tax, but without 10% penalty. From [URL="http://www.irs.gov/publications/p590/index.html"]Pub 590[/URL]:

If both you and your spouse are first-time homebuyers (defined later), each of you can receive distributions up to $10,000 for a first home without having to pay the 10% additional tax.

Qualified acquisition costs. Qualified acquisition costs include the following items.
Costs of buying, building, or rebuilding a home.

Any usual or reasonable settlement, financing, or other closing costs.

Or from a Roth IRA a person could take up to $10,000 of gains for same without tax or penalty (in addition to any already taxed "contributions"). However, that might not apply to an amount that was converted from IRA to Roth IRA within 5 yrs.