IRA Rules

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The Balancing Act Show 1103 – Homewatch International

Self-Direction — Can I Invest In Start Up or Existing Businesses?

Question: Early withdrawal from IRA used for a first-time home purchase, I need some guidance?

I took out some money from an IRA in 2006. I used it to purchase a home. However, the home is actually not in the United States. However, my name is on the title and some family members are living in the home currently. It is my first home. I am wondering, is this a qualified home purchase for an early withdrawal of an IRA, so that I don’t have to pay the penalties? It was a Roth IRA, so in theory, I should not have to pay anything on this to the IRS.

Answer: When you took out your money in 2006, you needed to report that on your tax return. You received a 1099R for the distribution. It was probably coded for an early distribution of a Roth IRA.

The IRS does not know how much of that distribution is the return of you contribution, or if you have an exception to the penalty. Hence, the big tax bill.

In order to figure the penalty on the distribution, or to document that no penalty applies, you need to fill out Form 5329. If you purchased a first home that was the main home of yourself, spouse, child, grandchild, parent, or other ancestor, you may escape the 10% penalty on $10,000 of the distribution.

If you did not follow the above procedure, you need to seek a professional tax preparer who can do an amendment for you.

If you do not qualify to escape the 10% penalty, then you will owe a penalty on the distribution that represents earnings of the Roth IRA. Again, Form 5329 is required to figure the correct tax.

Page 55 of the following publication explicitly defines what is a qualifying home purchase. There is no requirement that the home be in the United States.

http://www.irs.gov/pub/irs-pdf/p590.pdf