TRAD IRA , i have contribute tax deductible trad this year, would i be able withdraw the fund for 1st home buying on the same year?

[jackeren]

in August 2019 i contributed Traditional IRA for $6000 for the purposed of tax deduction

tho i have planned to distribute my funds of ($6000 or more) for paying First home buyer at closing time in December 2019.

my questions, am i still eligible to have tax deduction from my contribution TRAD IRA at the time of tax return ?

thank you

JD

[dmertz]

Yes, you'll still get the tax deduction for the $6,000 contribution and the contribution must be reported, but you'll also own taxes on the $6,000 distribution.  The first-time homebuyer's exception only exempts you from the 10% early-distribution penalty on up to $10,000 (lifetime) that would otherwise be due on money distributed from your traditional IRAs prior to age 59½, not from income taxes on the distribution.  The result will be essentially the same as if you had not made the $6,000 contribution except that you've unnecessarily used up $6,000 of your lifetime $10,000 limit on using the first-time homebuyer exception.  It generally makes no sense to make a contribution to a traditional IRA when you have the expectation of taking the money back out relatively soon thereafter.

[dmertz]

To avoid unnecessarily using the first-time homebuyer exception, instead of making a regular distribution of $6,000 you could obtain an explicit return of contribution from the traditional IRA.  Any investment gains on the $6,000 returned contribution would be required to accompany the $6,000 distributed and would be subject to ordinary income tax, but you could apply the first-time homebuyer's exception to the gains to avoid the 10% early-distribution penalty on the gains.  The returned $6,000 contribution will be treated as never having been made, so it won't be deductible on your tax return, but the returned $6,000 also won't be taxable or subject to any early-distribution penalty, only the gains will be taxable.

Again, it would have been better not to have made the contribution in the first place, but the contribution has already been made.

Of course if you don't actually need the $6,000 from the traditional IRA to make the home purchase, you can just leave it in there and take the deduction.

[jackeren]

Thank so much for the insight and information. 

background : i will indeed use the fund for home purchase down payment

i've already made the contribution, the reason i do this is to make deduction of $6000 to lower my tax return in year 2019.

thus i will make distribution for upto $10000 for home purchase that will close by end of this year

is that make any sense and right thing to do?

[dmertz · Accepted solution]

Doing as you propose will get you a $6,000 deduction on your tax return but the $10,000 regular distribution from the from the traditional IRA will add $10,000 to your taxable income.  Generally, it would be better to have never made the $6,000 contribution, temporarily invested that $6,000 outside the IRA, then take only a $4,000 distribution from the IRA to which you would need to apply the first-time homebuyer's exception.

So no, if you are proposing just making a regular distribution of $10,000, it does not seem to be the sensible thing to do.  In your situation it seems that it would be better to obtain a return of contribution of the $6,000 contribution and make a regular distribution of only $4,000, needing to apply the first-time homebuyer's exception to only the $4,000 plus any gains on the $6,000 distributed with the return of the $6,000.  This preserves a large portion of your $10,000 lifetime limit on the use of the first-time homebuyer's exception to the 10% early-distribution penalty.  By making a return of contribution (you must explicitly ask the IRA custodian to make a return of contribution) of the $6,000 you do not get the deduction but the $6,000 distributed as a return of contribution also does not get added to your taxable income.

Be sure to make the distributions shortly before the closing date of the purchase to give you the maximum window to treat the distribution as being for a first-home purchase.

[jackeren]

that's all make sense to me now! I really appreciate it so much.  Thank you