First Time Home Buyers Tax Tips

Under Internal Revenue Code 72(t), taxpayers who are under age 59½ may withdraw up to $10,000 lifetime limit from a IRA for qualified first-time homebuyer expenses without being subject to the 10% early withdrawal penalty. The rule applies to both tradditional and roth IRAs. For traditional IRAs, the distribution is generally subject to ordinary income tax.

This specification was later clarified in the 2015 court case: Lily Hilda Soltani-Amadi and Bahman Justin Amadi v. Commissioner. To assist in paying for their new home, Ms. Amadi made an early withdrawal from her 401(k) plan. The court determined that had they withdrawn from an IRA they would have been penalty free. However, an early withdrawal from a 401(k) requires a 10% penalty. Judge Armen summarized the issue by stating, “Congress chose to grant relief… for distributions from IRAs but not for distributions from other qualified plans, such as a section 401(k) retirement plan.”

In short, if you decide that it is in your best interest to withdraw money from your retirement plan to help pay for your first home – ensure that you are withdrawing from an IRA; the no 10% penalty relief granted by Congress, does not extend to any other retirement plan.

The above information is of a general nature only and should not be relied upon for specific situations. Click here for additional tax services information.

Call Marlies Y Hendricks CPA PLLC at either 716-694-3500 or 910-769-8730.