Using Traditional IRA as first time home buyer
Hello, My husband and I are looking to purchase our first home and we were told that I could use up to $10,000 from my traditional IRA penalty-free to apply towards our downpayment. First, I am seeking verification of this fact (because my bank where I hold the IRA hasn't heard of it) and second, if this is a legitimate first-time-home-buyer perk, how do I go about it? Thank you
Answer:
As a CPA, I came across this website and joined just last week, and I just came across your question.
First, assuming that you and your husband are each first-time homebuyers, you’re correct that you could use up to $10,000 from your traditional IRA penalty-free for a down payment.
Second, the mechanics of how to do it are a little more involved. If it were possible, I think the best course of action would be to have the bank transfer the money directly to the title company (or whoever is handling closing). This way, you never actually take possession of the money. If that were not possible, I’d have the bank make a check out to payee specified by the title company (or whoever is handling closing). A bank should be willing to at least do that much. If a bank was unwilling to do even that much, I suppose you could resort to taking out the money yourself, but then you leave yourself in a weaker position (from an audit perspective) if you were ever audited. Why put yourself in a position where you have to defend or explain or prove that you used the money correctly when you can avoid the problem altogether?
Third, come tax time next year, the bank should issue a Form 1099-R for the distribution. You’d have to prepare your tax return correctly, to report to the IRS that you qualify for the exception to the 10% early withdrawal penalty because you used the money for a first-time home purchase.
Finally, keep in mind that the $10,000 is a lifetime limit, to be used only one time.
Happy house hunting!
Adam Dickreiter
