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Tax Talk with George Saenz

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IRA home-buying limits

Dear Tax Talk:
I am receiving a rollover from my ex-husband's individual retirement account. What are the tax considerations if I withdraw the money from the IRA in the next month or two for the purchase of a first home for me. My ex-husband and I currently own a home together that is on the market, but probably won't sell it before I am ready to buy my house.

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Dear Susan:
Stop! Don't do what you're thinking of doing.

To make a penalty-free IRA withdrawal (income tax still applies) to purchase a first home, you have to have not owned a home in the last two years. Since you still own your former marital home, you won't qualify for the penalty-free withdrawal.

Of course, if you're over age 59½ you can always make a penalty-free withdrawal, but you would still owe income tax. If you're waiting to sell the old home shortly on which you probably won't owe any tax, I can't imagine why you would want to make a withdrawal that is taxable. You'll be better off waiting until the old home is sold and the proceeds divided to purchase your new home.

An alternative would be to take a withdrawal from the IRA for up to 60 days. So long as you replace the money from the IRA by the 60th day, you won't owe tax or penalty on the withdrawal. You might want to look at this possibility as soon as you receive an offer on the former marital home where you can use the proceeds to repay the IRA withdrawal.

-- Posted Nov. 20, 2001

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