I took out $60,000 from my Trad-IRA to put a down payment on my first home. I understand that I can pull $10,000 from my Trad-IRA tax free when doing this, but the...

[nicksellers]

I took out $60,000 from my Trad-IRA to put a down payment on my first home. I understand that I can pull $10,000 from my Trad-IRA tax-free when doing this, but the other $50,000 is taxed. Is the tax a flat 10% for doing this or does it scale with your income?

I ended up taking 24% federal and 4.50% state out of the full $60,000 because I was unsure...

[VolvoGirl · Accepted solution]

The whole amount is taxable.  The 10,000 is not tax free.  You are only avoiding the 10% Early Withdrawal Penalty on the 10,000.  So the whole 60,000 is added to your income and may push you into a higher tax bracket.  So it's not a flat 10%.  But then there is another 10% on the 50,000.  So it's really both.

[VolvoGirl]

So sorry, you can lose like up to 50% of it with federal and state taxes and penalties.  

[nicksellers]

Okay, so taking out 24% federal was probably the right move...It's actually a bene-Trad-IRA that I am required to empty over time(I think I have a maximum of 20 years to completely empty the account), so does that change the 10% penalty dealio?

[fanfare]

there is no 10% penalty on Inherited IRA distributions.

[fanfare]

There's no $10,000 penalty exemption on Inherited IRAs for home purchase either,since there is no penalty to begin with.

[nicksellers]

Great! Thanks everyone!

[fanfare]

Unless you elect the "five year" option, or you are a successor beneficiary, there is no minimum period to take all the funds from an inherited IRA. It is over at least your entire expected lifetime, and if you do not deplete it, your successor beneficiary will take over according to the rules.

[dmertz]

Since the distribution is from an inherited traditional IRA, meaning that there is no early-distribution penalty, the first-home penalty exception does not apply.  You can use the money without penalty for whatever you desire.  The taxable amount of the distribution is the same no matter what you do with the money (except in the case where you are over age 70½ and you make a qualified charitable distribution from the inherited IRA).

[Marcus_Elizabeth]

But what about just using a Traditional IRA to put down on a mortgage as a first time home buyer with a conventional loan between $5000 to $10000. Can taxes be paid at the time of the refund at the end of the tax year?

[VolvoGirl]

Yes that's when you pay the tax.....on your tax return.

What do you mean at the time of your refund?  You mean on your Tax return?

[Marcus_Elizabeth]

Yes, I do mean the Tax Return. I am entirely out of my game when it comes to explaining tax filing jargon. So when I close my IRA the bank will write me a check. What I need to do is deposit it into another account and use that account towards the down payment on a mortgage and at tax time fill it as a down payment towards a home? I know that I will have to pay income tax on it, but will I be exempt of any other penalty?

[VolvoGirl]

Depends, are you buying the house now or just going to pay on an existing mortgage?  

At the end of the year you will get a 1099R for the distribution which you enter into Turbo Tax.  If you are under 59 1/2 there is a 10% Early Withdrawal Penalty unless you have an exception.  It will ask if you have an exception.  That's all you do.

[dmertz]

Unless you meet one of the safe harbors, you can't just wait and pay a large balance due with tax return without penalty.  If you don't have a sufficient amount of taxes withheld from the distribution, you might have to make an estimated tax payment to avoid penalties for quarterly underpayment of taxes:

https://www.irs.gov/taxtopics/tc306

[Marcus_Elizabeth]

Yes, it would be for the first house my spouse and I have ever pursued and will be bidding on today. We plan to use the IRA as a downpayment.