Penalty waiver for early distribution from traditional IRA
A taxpayer who has never owned a home or has not owned a home in the last two years ending on the date of purchase qualifies for a penalty exception of distributing up to $10,000 from his or her IRA. If the taxpayer is married, the taxpayer’s spouse must also meet the two-year requirement as well. Taxpayers who take a distribution from their IRA to aid in the buying process of a home and who meet the requirements will be subject to income taxation of the amount distributed, but will not be subject to a 10% penalty for the amount that was distributed.
Besides the two-year ownership rule, the other criteria that must be met are:
- The amount must be used for the home purchase within 120 days of the date of distribution.
- Any amounts not used for the purchase of the home within the 120-day period will be subject to the 10% penalty.
The individual taking the distribution can be the taxpayer, the taxpayer’s spouse, child, grandchild or an ancestor of the taxpayer.
The penalty can also be avoided if the taxpayer places any remaining funds not used for the purchase back into the IRA within the 120-day period.