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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