Ask the Experts!
The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers. Here’s the question of the day.
Question: My client wants to use part of his traditional IRA account to make a down payment toward the purchase of his primary residence. What are the tax consequences of doing so?
Answer: Distributions from traditional IRAs are completely income taxable for most taxpayers, unless they have after-tax contributions in one or more traditional IRAs. If the taxpayer has after-tax contributions in any IRA, the distribution will be partly income tax free.
If the taxpayer is younger than age 59 ½, the taxable part of the distribution may also be subject to the 10% premature distribution penalty. There is a special exception to the penalty for distributions related to first-time homebuyers.
The homebuyer can be the taxpayer or a close member of the taxpayer’s family. To qualify for the exception, the money must be used within 120 days after distribution from the IRA for home purchase expenses.
A taxpayer can only claim use this exception to shelter up to $10,000 of distributions from the penalty tax during the taxpayer’s lifetime.
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