Your Money. Your Terms – How to Avoid Paying the 10% Penalty on Retirement Savings Withdrawals – First Time Homebuyers Exemption

Continuing in our series on exceptions to the 10% withdrawal penalty, we identify qualified first-time homebuyers as another exception.

Rules

This exception applies to IRAs only.  Employer Qualified Retirement plans are not eligible for the exception.

You may request a distribution of up to $10,000 to apply towards the purchase of your primary residence. If you are married, and your spouse is also first-time homebuyer, theymay also request a $10,000 distribution from an IRA. This would provide $20,000 available to apply to the purchase of the home.

This can even be used if it technically is not your first home. You may qualify under the tax rules, as long as you (and your spouse, if applicable) have not owned a primary residence during the previous two years.

The first-time homebuyer funds can be used for the purchase of the primary residence for you, your spouse, your children, your grandchildren or your parents.

The funds must be used within 120 days of the initial distribution to pay related costs associated with the purchase of the home.  This may include buying/building a home and/or closing costs.

Tax Reporting

When you take the money from your IRA, tell your financial institution you are using the money for a home and plan to claim the exemption. When you get your 1099-R statement after the end of the year, it should contain code “2” in box 7, which tells the IRS the distribution is exempt from the penalty.

If your 1099-R does not contain a “2” in box 7, and you do not have a corrected statement, you will need to fill out Part I of Form 5329 and submit it with your tax return. On this form, you will enter exception number “09” on line 2 to indicate the withdrawal was for a first home purchase.