|
Understanding First Time Home Purchase and Tax on IRA Withdrawal:
The new tax law allows people to receive distribution from their traditional IRA to pay up to $10,000 as a first time home buyer and this can be done without the fear of being slapped with a 10 percent early withdrawal penalty. Although the penalty is not imposed, you will still have to pay applicable taxes on the withdrawal amount.
When it comes to taking distribution from a Roth IRA to finance a first time home purchase, the rules are slightly different compared to a traditional IRA. If you make a withdrawal from a Roth IRA to purchase your first home, it is considered as a qualified distribution as long as the account has been operational for 5 tax years. Therefore, distribution taken from a Roth IRA to finance a first time home is not just income tax free but also penalty free.
A point to remember is that under the Roth distribution rules, the money that can be withdrawn first is the annual contribution, which is never taxed or penalized. Thereafter, the next distribution that can be taken out is the conversion money which is also not taxed or penalized as long as the Roth IRA has been opened for 5 tax years. The last distribution is always the earnings. This means that the only money that could cause a problem when taken out from a Roth IRA to finance the purchase of a first home would be when Roth has been operational for less than 5 tax years.
In case you withdraw your earnings or conversion before the necessary lapse of 5 tax years, the earnings would not levied an early withdrawal penalty but you would have to pay the applicable taxes similar to those paid on withdrawal from a traditional IRA. When it comes to withdrawal of conversion money, you would not have to pay taxes because you have already paid them but you would have to pay the 10 percent early withdrawal penalty.
More Articles :
|
History of home purchase has shown us that when a potential home buyer wants to purchase a home, he has to keep certain considerations in mind before going ahead with the deal. The following are critical considerations that one needs to think about. 
