IRAs To the Rescue For First-time Home Buyers
Taking an Early Distribution Penalty-free for Buying First Homes
Buying a home is a huge step in life. For most, it is the first major investment decision in life. The biggest obstacle faced by most first-time home buyers is acquiring money for down payment and closing costs. With today's tighter mortgage requirements, coming up with the 10 to 20% down payment can be a real problem for many young couples.
For people with an IRA account, taking an early distribution from their IRA account is a good choice. Generally IRS rules require that a person should be 591/2 or older to take distributions from his/her IRA account. If he takes an early distribution, he will need to pay a 10% penalty on the early distribution amount. However, thanks to the Taxpayer Relief Act of 1997, a first-time home buyer can take up to $10000 from his IRA account without penalty to buy a primary residence.
The rules regarding the early distribution for a first-time home buyer varies slightly between Traditional and Roth IRA Accounts. The difference is on account of whether the amount withdrawn from the IRA account will be subjected to Income tax.
Traditional IRA Accounts
For Traditional IRA accounts, the 10% penalty is waived, but the account holder still need the early distribution amount added to his Adjusted Gross Income(AGI) for the purpose of calculating his income tax.
Roth IRA Accounts
For Roth IRA accounts there is no 10% penalty and the amount withdrawn need not be added to his Annual Gross Income, but the Roth IRA account must have been maintained for five tax-years. For more information regarding Roth IRA distributions, refer http://www.irs.gov/taxtopics/tc428.html.
Definition of First-time Home Buyer
A first-time home buyer is someone who has not owned a home for the two year period ending on the date of acquisition of the new home. If he is married, his spouse must also meet this no-ownership requirement. The withdrawal from IRA account can be used to finance the purchase of a home in the name of the IRA owner, his or her spouse, or any of his children, grandchildren, or ancestors.
Lifetime Limit
$10000 is a lifetime limit, meaning that one cannot take a penalty-free withdrawal from his IRA account every time he purchase a house, even if he qualifies for the first-time home buyer clause. Once buyers have withdrawn a total of $10000 from their account, they are done. If the home buyer and his wife both own IRA accounts and both qualify the first-time home buyer requirement, then they both can withdraw a maximum of $10000 each for the purpose of buying a home.
Qualified Acquisition Costs
The penalty-free withdrawal must be made towards the payment of qualified acquisition costs of the house before the close of the 120th day after the day you received the distribution. Qualified acquisition costs include the costs of buying, building, or rebuilding a home and any usual or reasonable settlement, financing, or other closing costs.
With the sale of houses at an all-time low and the prices having come down to a reasonable level again, this is the ideal time to change status from a renter to a home owner. With a little planning and an early distribution from IRA account, it can be made possible.
Refer publication 590 for more information on Individual Retirement Arrangements.
IRA For Down payment
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