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This Web site contains a compilation of more than a thousand consumer finance  columns written by Tony Novak from the 1980s through 2006, updated and reformatted for maximum usefulness today.  New material was added after 2010.

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First time home purchase

originally posted: 11/22/2006  reposted: 2/18/2011 This post has not been recently reviewed or revised by the author and may be out of date. If you notice an error or are in doubt, please send a new question by email or ask for an update. Email

Q: I have $24,000 in a rollover IRA account. I am considering cashing that out to put towards a home down payment. would i be looking at any sort of tax penalty when i comes tax time? I have heard that you are allowed $10000 to use towards a home down payment from an IRA that would not be taxable for 1st time homebuyers. I have previously owned a home so I don't believe I would fall under the 1st time homebuyer category. I would like to know what sort of tax penalty I would be looking at if I used this $24,000 towards a down payment?

A: The definition of "first time home buyer" is more liberal than you might expect, so start by checking the Web site to see if you qualify under this definition. The tax law allows first time home buyers to avoid an early withdrawal penalty on up to $10,000 of IRA money that is used for the purchase. However, many people forget to consider that the money is still included as regular taxable income in the year that you use it. In other words, the tax you owe on a $24,000 IRA withdrawal might be $4,000 instead of $5,000. But there is still some tax due on the withdrawal. (This tax due calculation is only a rough estimate as an example – each person’s actual tax calculation is different). Here are a few quick tips: 1) Buy the house in the same tax year that you make the IRA withdrawal. (In other words, do not make a withdrawal in December and but the house in January). 2) Plan to offset IRA income with deductible closing expenses and mortgage interest in the year you buy the house. This only works if you itemize tax deductions – some homeowners with relatively inexpensive homes do not do this. The best approach is to do a little advance tax planning with a tax professional who can draft a rough pro forma tax calculation for the year that you plan to buy the house. 3) If you will owe taxes on the withdrawal then have your IRA custodian withhold enough money to pay the bulk of this tax. (This can be specified on the withdrawal request form). People who buy a home tend to spend a lot of money in the first year of ownership but you must be sure to have enough left over to pay any remaining tax bill that may be due the next April 15. 4) As a rule to thumb, plan to set aside $500 to have both an accountant review your home ownership finance and tax plans and another $500 to have an attorney review the purchase and closing documents. These extra expenses will likely save you money in the long run.


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