How can I avoid the penalty for early withdrawal from my traditional IRA on the $10,000 I spent on my first house?
I bought my first house this year, and withdrew money out of my traditional IRA to do so. How can I avoid the penalty for early withdrawal on the first $10,000 I spent on my house? I am filing my taxes and want to make sure I don’t pay more than I have to.
As long as 1) you entered a binding contract with the seller or you began construction within 120 days of withdrawing the 10 thousand dollars from your traditional IRA, and 2) you did not previously own any home for two full years prior to that date, you will be okay. Be sure to fill out Form 5329 when you do your federal income tax and fill out exception "09" on that form which is the exception for an IRA withdrawal to fund a "first-time" home purchase.
So long as you qualify for the first time home buyer exemption (as you have indicated) then you can withdraw the $10,000 penalty free. Keep in mind, the withdrawal will be penalty free under the exemption but you will still be taxed on the withdrawal if your contributions were tax deductible over the years. Be sure to keep accurate and detailed documentation of the withdrawal and purchase of the home so you can prove to the IRS that the withdrawal is exempt from penalty. The exemption is claimed on IRS Form 5329 if your 1099-R doesn't indicate that the distribution was qualified. I have included a link below from the IRS website so you can "hear it straight from the horse's mouth" and because it dives into the details of the summary I provided. I hope this helps you when filing your taxes, congratulations on your first home purchase!
Investopedia has a great article on your exact situation. You can read it HERE.
A couple of excerpts:
"To use money in your IRA to buy a house, you must be a first-time homebuyer. You are considered a first-time homebuyer if you haven’t owned a home (or had financial interest in one) at any point during the last two years. So, even if you owned a house at some point in the past – say, five years ago – you may well meet the first-time buyer requirement."
"If you qualify as a first-time homebuyer, you can withdraw up to $10,000 from your traditional IRA to help cover the costs of buying a home. Your spouse can also withdraw up to $10,000 from his or her IRA (remember, IRAs are individual retirement accounts; you don’t “share” them with a spouse). Remember that even though you’ll avoid the 10% early withdrawal penalty, you’ll still owe income tax on any amount you (and your spouse) withdraw."
Best of luck with the tax prep!