The IRS offers a little talked about exception to the 10% penalty on early withdrawns from IRAs to help first time home buyers (which the IRS defines loosely as anyone who hasn't owned a primary residence in two years) use IRA funds without penalty. Of course, the regular tax would still apply, but it's an option to consider if it means the difference between getting into the real estate market while its low or watching the market come back up beyond your reach.
A couple buying a house can use up to $20,000 of IRA funds to help with their down or closing costs ... read on ...
From IRS publication 590:
Even if you are under age 59½, you do not have to pay the 10% 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.
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It must be used to pay qualified acquisition costs (defined later) before the close of the 120th day after the day you received it.
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It must be used to pay qualified acquisition costs for the main home of a first-time homebuyer (defined later) who is any of the following.
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Yourself.
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Your spouse.
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Your or your spouse's child.
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Your or your spouse's grandchild.
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Your or your spouse's parent or other ancestor.
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When added to all your prior qualified first-time homebuyer distributions, if any, total qualifying distributions cannot be more than $10,000.
Qualified acquisition costs. Qualified acquisition costs include the following items.
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Costs of buying, building, or rebuilding a home.
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Any usual or reasonable settlement, financing, or other closing costs.
First-time homebuyer. Generally, you are a first-time homebuyer if you had no present interest in a main home during the 2-year period ending on the date of acquisition of the home which the distribution is being used to buy, build, or rebuild. If you are married, your spouse must also meet this no-ownership requirement.
Date of acquisition. The date of acquisition is the date that:
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You enter into a binding contract to buy the main home for which the distribution is being used, or
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The building or rebuilding of the main home for which the distribution is being used begins.
Note from Nancy: If your retirement funds are in an employer account, they must first be transfered to an IRA to apply this exception. Check with your CPA and Employer for details.
Of course, this nugget of knowledge is not meant to be tax advice, just good information for first time home buyers to research with their CPA and Realtor as another option to get into this hot buyers market.
Much success,
Nancy Moeller, CPA, REALTOR
RE/MAX Real Estate Services
714 276-7006
