Early Withdrawal

Archive for January, 2009

Question: How/when do I report first-time home purchase to avoid 10% early Ira Withdrawal?

I rolled money from my 401K to a roll-over IRA to be used as a down payment on my first-home purchase. I understand $10K of that will penalty free, but how/ when do I report it? Are there any special rules I’ll need to follow to make sure I don’t disqualify myself (i.e. monies have to be sent directly from IRA to lender). Also, I read on gov page that wife is also entitled to $10K penalty free. Does it matter if the total of $20K came from the same IRA?

Answer: First home. Even if you are under age 59½, you do not have to pay the 10% additional tax on up to $10,000 of distributions you receive to buy, build, or rebuild a first home. To qualify for treatment as a first-time homebuyer distribution, the distribution must meet all the following requirements.
It must be used to pay qualified acquisition costs (defined later) before the close of the 120th day after the day you received it.

It must be used to pay qualified acquisition costs for the main home of a first-time homebuyer (defined later) who is any of the following.

Yourself.

Your spouse.

Your or your spouse’s child.

Your or your spouse’s grandchild.

Your or your spouse’s parent or other ancestor.

When added to all your prior qualified first-time homebuyer distributions, if any, total qualifying distributions cannot be more than $10,000.

Form 5329 needs to be completed

http://www.irs.gov/pub/irs-pdf/i5329.pdf

http://www.irs.gov/pub/irs-pdf/f5329.pdf

A withdrawl from each person’s individual IRA qualifies,

Publication 590

It is reported in the year the distribution was taken

http://www.irs.gov/publications/p590/ch01.html#d0e8295

Stocks, Mutual Funds & Retirement Investments : Withdrawal Rules for Traditional IRA

Question: Ira Withdrawal for a home?

Can my wife withdraw on HER IRA with no tax and penalty event to purchase a home. I purchased our 1st house without her on title and using just my social secuirty #.. Can she buy a house utilizing her IRA $$$ and just her ssn keeping me completley off? Does she qualify as a 1st time home buyer if she does it on her own?

Answer: 1. The first-time home buyer exception applies only to the penalty, not to the tax.

2. For married couples, the exception applies only if neither spouse owned a home within the two-year period ending on the date of the purchase of the new home.

Therefore, she won’t qualify until two years after you sell the home in which you live.

Authors@Google: Ramit Sethi

Question: How would you invest $33,000? It must be very low risk and available in 3 years for withdrawal without penalty

I am advising a treasurer of a non-profit organization that has received $33,000 to invest. The money is in the name of the non-profit and sitting in a money market account at the local bank earning about 3.9% interest. The account is “owned” by the non-profit and is associated with their Employer ID Number (EIN). It cannot be put into personal accounts, IRA’s, etc. for this reason.

Answer: I would advise one of the following:

1) Long-term CD – you will get a rate around 5.5%.
2) Short-term CD – not locked in long-term, and if the rate goes higher, you can take advantage of the higher rate. The danger is if the interest rate drops, then you will be stuck with a lower rate.
3) Preferred stock – many companies, in addition to common stock, also have preferred stock. The stock does not have any voting rights, but does pay a dividend. Some companies pay very well on these dividends. You can check around and see if you can get anything better than 5.5%.
4) Municipal bonds – these are bonds that might fund a particular project in your area, such as building roads, schools, or a public swimming pool. These are tax-free, however. I’m not too familiar with non-profits, but if they don’t pay taxes, then I would not recommend municipal bonds. They are better for individuals and companies that normally pay high tax rates. The danger is that the project gets mismanaged and you have difficulty recovering the principal, although that is somewhat rare…but I figure you should know the risks.

Do NOT buy corporate bonds because while they could pay a higher interest rate, there is a possibility of declining principal that could offset the interest rate.

If you absolutely must not lose money under any circumstances, I would advise them to start with short-term CD’s (3-6 months) and reinvest the money each time upon maturity. If the Fed starts thinking about lowering interest rates, then move the CD’s to a longer term after the next 3-6 month maturity. So they would need to keep an eye on what the Fed does, but maybe they think that’s too risky. If 5.5% is great for them, then just go with the longer term right off the bat.

Roth vs. Tradtional 401K — Which Should I Choose