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-- Posted: Jan. 31, 2000

Dorothy Rosen -- The Dollar Diva Ask the Dollar Diva

An IRA break for first-time home buyers

Dear Dollar Diva,
I have money in an IRA and want to use it to buy a home. If I take the money out before I'm 59-1/2 years old will I be penalized, or is there a break for first-time home buyers?

--Bart


You're in luck! First-time home buyers get a break -- if it's a traditional IRA. The Roth IRA has to be held for five years before you can get this break, and, since it originated in 1998, nobody has a Roth old enough to be eligible. Here are the rules that have to be followed to avoid the 10 percent early withdrawal penalty:

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  • The first-time home buyer cannot have had an ownership interest in a main home for two years prior to the acquisition of the new home. If he is married, his wife must also meet this requirement.
  • Withdrawals can be spent for buying, building or rebuilding a home, and for any usual settlement, financing or other closing costs.
  • The above costs must be paid within 120 days of the IRA withdrawal.
  • You can be the first time home buyer for whom the withdrawal is made, or it can be your wife, or the child, grandchild, parent or other ancestor of you or your wife.
  • The maximum amount that can be withdrawn for this purpose is $10,000. This is a lifetime maximum, so if you withdraw $6,000 now, you will only be able to withdraw $4,000 without penalty next time.
  • If you and your spouse are first-time home buyers, each of you can withdraw up to $10,000 for first-home expenses.

Remember, even though you beat the penalty, you have to pay income tax on the distribution at your current marginal tax rate.

You can download IRS Publication 590, Individual Retirement Arrangements (IRAs) (Including Roth IRAs and Education IRAs), for more details on this and the other early withdrawals that are not subject to the penalty, i.e. certain higher education and medical insurance expenses.

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