Question:
Dear Tax Talk,
I rolled over money from an employer-sponsored 401(k) plan to an IRA in 2007. I retired in 2006 as my company merged and relocated. Early this year, I withdrew funds for down paymenton a home. I qualify for the $10,000 for first-time homebuyer as it relates to not having the 10 percent tax penalty. Since I was over 55 when the withdrawal occurred and I had service separation from my company, am I exempt completely from a 10 percent tax withdrawal penalty?
A. Johnson
Answer:
Dear A. Johnson,
As a first-time homebuyer, you can make a penalty-free withdrawal from your IRA to use toward the purchase including closing costs of a home, provided you have not owned a principal residence within two years on the date of acquisition of the new property. The funds must be used to acquire the home within 120 days from their withdrawal. The date of acquisition is considered the date that you enter into a binding contract to buy the new home, not the date of closing.
When an individual or otherwise leaves his employer in or after the year they turn age 55, he or she can make penalty-free withdrawals from his employer-sponsored retirement plan. This is referred to as the separation from service exception. The withdrawal can be a complete or partial distribution, and there is no requirement to receive further distributions. This exception would be advantageous if you plan to start your own business or cover other needs.
