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Level 1

Early withdrawal of Roth IRA for downpayment

I will be making an early withdrawal of $10,000 from my Roth IRA, which was opened in 2008 for a newly built construction home. However, the home won’t be built until Feb 2021. Along the way, I will be adding upgrades to the home where I will have to put a deposit. The deposit will go into the escrow account and count towards the down payment. I know there’s a rule of spending the withdrawal amount within 120 days. All the upgrades/deposits will be within 120 days. Does this fall in line with purchasing a new home? Thanks

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Level 15

Early withdrawal of Roth IRA for downpayment

If you are over 59 1/2 then it is irreverent.

 

Here are the rules:

 

https://www.irs.gov/pub/irs-pdf/p926.pdf

 

First home.

Even if you are under age 59½, you don't 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.

  1. It must be used to pay qualified acquisition costs (defined next) before the close of the 120th day after the day you received it.

  2. It must be used to pay qualified acquisition costs for the main home of a first-time homebuyer (defined below) who is any of the following.

    1. Yourself.

    2. Your spouse.

    3. Your or your spouse's child.

    4. Your or your spouse's grandchild.

    5. Your or your spouse's parent or other ancestor.

  3. When added to all your prior qualified first-time homebuyer distributions, if any, total qualifying distributions can't be more than $10,000.

If both you and your spouse are first-time homebuyers (defined later), each of you can receive distributions up to $10,000 for a first home without having to pay the 10% additional tax.

 

Qualified acquisition costs.

Qualified acquisition costs include the following items.

  • Costs of buying, building, or rebuilding a home.

  • 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:

  • You enter into a binding contract to buy the main home for which the distribution is being used, or

  • The building or rebuilding of the main home for which the distribution is being used begins.

If you received a distribution to buy, build, or rebuild a first home and the purchase or construction was canceled or delayed, you could generally contribute the amount of the distribution to an IRA within 120 days of the distribution and not pay income tax or the 10% additional tax on early distributions. This contribution is treated as a rollover contribution to the IRA.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

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2 Replies
Highlighted
Level 15

Early withdrawal of Roth IRA for downpayment

If you are over 59 1/2 then it is irreverent.

 

Here are the rules:

 

https://www.irs.gov/pub/irs-pdf/p926.pdf

 

First home.

Even if you are under age 59½, you don't 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.

  1. It must be used to pay qualified acquisition costs (defined next) before the close of the 120th day after the day you received it.

  2. It must be used to pay qualified acquisition costs for the main home of a first-time homebuyer (defined below) who is any of the following.

    1. Yourself.

    2. Your spouse.

    3. Your or your spouse's child.

    4. Your or your spouse's grandchild.

    5. Your or your spouse's parent or other ancestor.

  3. When added to all your prior qualified first-time homebuyer distributions, if any, total qualifying distributions can't be more than $10,000.

If both you and your spouse are first-time homebuyers (defined later), each of you can receive distributions up to $10,000 for a first home without having to pay the 10% additional tax.

 

Qualified acquisition costs.

Qualified acquisition costs include the following items.

  • Costs of buying, building, or rebuilding a home.

  • 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:

  • You enter into a binding contract to buy the main home for which the distribution is being used, or

  • The building or rebuilding of the main home for which the distribution is being used begins.

If you received a distribution to buy, build, or rebuild a first home and the purchase or construction was canceled or delayed, you could generally contribute the amount of the distribution to an IRA within 120 days of the distribution and not pay income tax or the 10% additional tax on early distributions. This contribution is treated as a rollover contribution to the IRA.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

View solution in original post

Highlighted
Level 15

Early withdrawal of Roth IRA for downpayment

For a Roth IRA, you may withdraw principal contributions tax-free at any time.  You only have to worry about tax and penalties if you are dipping into the income (growth).

 

If you are dipping into the growth, then that part of the distribution will be subject to income tax and a 10% penalty if you are under age 59-1/2.  You can be exempt from the 10% penalty using the first time home buyer rule.  In the case of a home under construction, the 120 days counts backwards from when you start living in the home (it is complete and you have a C/O and move in). 

 

*Answers are correct to the best of my ability but do not constitute legal or tax advice.*
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