Withdraw funds from retirement account for new home

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Nichola111
Nichola111 Member Newcomer

My husband is 68 and we are purchasing a new home which will be our primary residence. If he withdraws funds from his retirement account to use as a down payment for the purchase of new home will he have to claim the withdrawal as income and if so how much will he be taxed

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  • KristineS
    KristineS FreeTaxUSA Agent
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    Hi Nichola111, great question!

    The answer is 'maybe.'

    It depends on whether or not you and your husband meet the definition of a first-time homebuyer and what type of retirement account the money is coming out of.

    The rules for what the IRS considers a first-time homebuyer state you may not have a 'present interest in a main home during the 2-year period ending on the date of acquistion.' In other words, if you and your husband currently own and live in a main home for the last 2 years, and now you want to go buy a new home, you do not meet the qualifications of a first-time homebuyer. Both you and your husband must meet this qualification.

    If you meet the first-time homebuyer qualification, and the money is coming from a Roth IRA account, and the amount you're withdrawing was funded at least 5 years ago, i.e. your contributions, the money withdrawn is tax and penalty free for the purchase of a new home. You must also use the money within 120 days of withdrawal.

    Let's say the money is coming out of your husband's 401(k) or traditional IRA. You'll report the withdrawal as income on your tax return and pay income tax on it at your normal rate. Becuase your husband is older than 59.5, there is no 10% additional penalty.

    In conclusion, unless it's a Roth IRA the income is going to be taxable.

  • srigas
    srigas Member Newcomer
    edited December 2023
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    I am confused by your answer. Define ‘present interest.’ I sold my home on Feb. 14, 2023 which I had lived in since Jan. 2022. I had a new home built and moved in on Sept. 29, 2023. I withdrew $10,000 from my annuity to complete the payment on the new house. Is the $10,000 taxable income?

  • srigas
    srigas Member Newcomer
    edited December 2023
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    I am confused by your answer. Define ‘present interest.’ I sold my home which I had lived in since Jan. 2022 on Feb. 14, 2023. I built a new house which I moved into in Sept. 2023. I took $10,000 out of my annuity to complete payment on the new house. Is the $10,000 taxable income?

  • MatthewD
    MatthewD FreeTaxUSA Team
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    Hi srigas,

    "Present Interest" means do you have an ownership or lived in the home. Often, we use the term "interest" to define a person's connection to the home.

    Yes, the 10,000 distribution will be taxable, and if you are not at least 59 1/2 (retirement age) you will likely have an additional 10% early withdrawal penalty on that distribution. I think what you are referring to is the early withdrawal penalty exemption for the 1st time purchase of a new home.

    The rules for a 1st time home buyer and the 10% penalty exemption don't apply if you are moving directly from a previously owned house to another. Generally, two years must elapse when you were a homeowner, till you move into a new home for the exemption to apply to the IRA (or annuity) distribution.