If you or someone in your family is a renter who is looking to buy a home, you may be interested in considering how you can use up to $10,000 of the funds in your traditional individual retirement account (IRA) to help pay for the home.
Although you can withdraw or use the assets in your traditional IRA at any time, withdrawals before age 59½ are considered early distributions. Generally, if you take an early distribution from your traditional IRA, you must pay a 10 percent additional tax. The 10 percent additional tax applies only to the part of the distribution that you must include in gross income and is in addition to any regular income tax on that amount.
There are, however, several exceptions to the age 59½ rule. Under one such exception, even if you are under age 59½, you do not have to pay the 10 percent additional tax on up to $10,000 of distributions you receive to buy, build, or rebuild a first home. To qualify for treatment as a first-time homebuyer distribution, the distribution must meet all the following requirements:
First, the distribution must be used to pay Qualified Acquisition Costs before the close of the 120th day after the day you received it. Qualified acquisition costs include costs of buying, building, or rebuilding a home, and any usual or reasonable settlement, financing, or other closing costs. If you received a distribution to buy, build, or rebuild a first home and the purchase or construction was canceled or delayed, you generally can contribute the amount of the distribution to an IRA within 120 days of the distribution. This contribution is treated as a rollover contribution to the IRA.
Second, the distribution must be used to pay qualified acquisition costs for the main home of a “first-time homebuyer,” who can be yourself, your spouse, your or your spouse’s child, your or your spouse’s grandchild, or your or your spouse’s parent or other ancestor. Generally, an individual is a first-time homebuyer if he or she had no present interest in a main home during the two-year period ending on the acquisition date of the newly purchased, newly built, or newly rebuilt home. If the individual is married, his or her spouse must also meet this no-ownership requirement. The acquisition date of the home is the date on which a binding contract to buy the home is entered into, or the building or rebuilding of the home begins.
Third, when added to all your prior qualified first time homebuyer distributions, if any, total qualifying distributions cannot be more than $10,000. If both spouses are first-time homebuyers, each can receive distributions up to $10,000 for a first home without having to pay the 10 percent additional tax.
Please contact the office of Don Fitch Accountancy at (760)567-3110 or Email Don.Fitch@CPA.com if you have any questions or would like additional information.
DON FITCH, CPA
74478 Highway 111 #3
Palm Desert, CA 92260
Toll Free: (877)CPA-Help or (877)272-4357
P.S. My firm is based upon referrals. Please feel free to refer my firm to anyone you know that is looking for a new CPA and/or tax preparer. Thank you in advance.
(Updated 050262021-1 320-555)