Dear Tax Talk,
I took a one-time first-time homebuyer disbursement of $10,000 from my 403(b) retirement plan. When I took it out of the retirement fund, they said they also had to take out the money for tax. So my total 403(b) withdrawal ended up being $12,500. As I understand it now, that means that I have to pay the penalty because I went over the $10,000 because they made me take the tax out. What percentage of the 403(b) withdrawal is subject to the tax penalty? Is it on the whole $12,500, or just the $2,500 over the $10,000 allowable disbursement?
Hero Images/Getty Images
At the end of the year, the $12,500 withdrawal will be reported to you by the trustee of your retirement plan on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. You will also see on the form that the $2,500 in taxes that were withheld will be reported in Box 4. You will owe taxes on the entire $12,500 and the 10% additional tax penalty will also be owed on the $2,500 if you meet the requirements for a first-time homebuyer.
RATE SEARCH: In the market to buy a house? Find the best mortgage rate here today!
Withdrawal rules for first-time homebuyers
The IRS allows the exclusion from the additional 10% tax on a $10,000 distribution for first-time homebuyers. Interestingly enough, this exclusion applies not only for you and your spouse, but also the children, grandchildren or parent of you or your spouse.
Even better than that, the IRS has its own definition of “first-time homebuyer.” The general rule is that you are considered a first-time homebuyer if you had no present interest in a main home during the 2-year period ending on the date of acquisition of the new home. In other words, you could have owned any number of homes at any time prior to the 2-year period before the home purchase. If you are married, your spouse must also meet this 2-year no-ownership requirement.
Qualified costs include buying, building or rebuilding a home and any usual or reasonable settlement, financing or other costs.
RATE SEARCH: Looking for a good mortgage rate? Find the best rate here today!
Now let’s go over the reporting details to the IRS. Once you receive the Form 1099, you include the distribution on Form 1040, line 15 or 16, depending on which specific type of retirement account the withdrawal came from. You also report the amount of taxes withheld on line 64. Finally, you will need to complete Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts. In Part l, Line 1 you report the $12,500. On line 2 you report the $10,000. Be sure to include on line 2 the “appropriate exception number” which, in your case, is “09.” Line 4 is where you calculate the additional 10% tax on the $2,500.
Thanks for the great question and best wishes to you in your new home.
Ask the adviser
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.