For IRA distribution exception for 1st time house purchase, what form of proof must I furnish to IRS that distribution was for house purchase and when must I furnish it?

[Jeannette3]

Client has a 1099-R with a code 4 in box 7. I am attempting to exempt $10,000 for first time home purchase. System does not respond to the deduction. Can anyone help?

[DianeW777]

Yes, help is available. The code 4 in box 7 represents the death of the original owner of the retirement plan. In this situation there is no 10% premature distribution penalty since it is the beneficiary who is taking a withdrawal. 

It does not eliminate the personal income tax on the distribution.  This would be the same situation if the original owner had taken $10,000 for a first time home purchase.  The income is still taxable but without the penalty.

• What do all the codes mean in Box 7, Form 1099-R?
• IRS Topic 557-Additonal Tax on Early Distributions

Please update here if you need further assistance.

@Jeannette3

[ronjrsm32]

I could not find anywhere to indicate the 401k withdrawal was used by a first-time homeowner.  It is not on the list of exceptions to the 10% penalty.

[DoninGA]

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@ronjrsm32 wrote:

I could not find anywhere to indicate the 401k withdrawal was used by a first-time homeowner.  It is not on the list of exceptions to the 10% penalty.

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There is not an early withdrawal exception for a first-time homeowner when the distribution is from a 401(k).  That exception is only available if the withdrawal was from an IRA and then only the first $10,000 is exempt from the 10% early distribution penalty.

[kalenebernhardt]

If you withdraw from a Roth for first time home purchase, will you still be taxed on the amount as income? 

[Opus 17]

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@kalenebernhardt wrote:

If you withdraw from a Roth for first time home purchase, will you still be taxed on the amount as income? 

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When you withdraw from a Roth, you are treated as withdrawing contributions first, conversions second, and earnings last.  Withdrawal of contributions is never taxed.  Sometimes, a withdrawal of a conversion is subject to a 10% penalty, and withdrawal of earnings is always subject to a 10% penalty if you are under age 59-1/2.  Withdrawal of earnings is also subject to regular income tax if you are under age 59-1/2.  How your particular withdrawal is taxed is based on the makeup of funds in your specific Roth IRA. 

So for a Roth IRA, the first time homebuyer exception means that if you withdraw contributions, they are tax free, as always.  If you withdraw a prior conversion that is subject to the 10% penalty, you can be exempt from the 10% penalty for the conversion withdrawal, and if you withdraw earnings before age 59-1/2, you can be exempt from the 10% penalty but not regular income tax (up to a combined maximum of $10,000 of conversions and earnings). 

[Linds B]

I would like to make a withdrawal from my retirement account for a down payment of my first home. This is retirement account is just in my name. This is first time I am purchasing a home, but not my husband's. We are on the home contract together. Will I be taxed 10% or will I qualify for exemption?

[Opus 17]

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@Linds B wrote:

I would like to make a withdrawal from my retirement account for a down payment of my first home. This is retirement account is just in my name. This is first time I am purchasing a home, but not my husband's. We are on the home contract together. Will I be taxed 10% or will I qualify for exemption?

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You can be exempt from the 10% penalty for early withdrawal for up to $10,000 used for a "first time" home purchase.  The IRS definition of a "first time" purchase is that you can't have owned or co-owned the place you considered your main home at any time in the 2 years prior to the home purchase that you want to use for the exception.  If you are married, your spouse must also meet the no-ownership requirement for the past 2 years. 

That means you can qualify for the exception if you or your spouse owned other property, and you can qualify for the exception if your spouse owned a home but sold it more that 2 years ago, or moved out and used it as a rental, as long as you and your spouse did not own the home you used as your main home for the past 2 years. 

Also, the homebuyer exception only applies to IRAs.  Not to any other kind of plan.  If you have a 401k or other plan, you may be able to do a rollover of funds into an IRA and then withdraw from the IRA.  But if you directly withdraw from another plan, it won't qualify for the penalty exemption.