Welcome

Partially correct. Most retirement distributions (withdrawals) are taxable. However, the distribution might qualify for exception to the Early Distribution Penalty (no additional 10% tax) if:

1. Taxpayer is under age 59 ½ and no other early distribution tax penalty exceptions apply
2. Distribution is from an Individual Retirement Account (IRA)
3. Taxpayer qualifies under the IRS rules as a First-Time Home Owner (if married both spouses must qualify as first time homeowners) and
4.  Distribution is $10,000 or less per taxpayer.

Part One –Under Age 59 ½: Currently, if a taxpayer takes a retirement distribution before age 59 ½ there is usually tax on the distribution plus an additional TEN percent penalty unless an exception applies. However, an exception only cancels the ADDITIONAL TEN percent penalty. It does not cancel the tax on the distribution.

Part Two–IRA: An individual retirement account (IRA) is usually set up out side of a regular company retirement plan. Its similar to a 401K in that it helps taxpayers save for retirement. However the 401K and IRA tax and penalty exception rules vary.

Part Three—First-Time Home Buyer: IRS definition:   Taxpayer has not owned a principal residence for at least two years. If taxpayer is married, then both spouses must qualify as First Time Home Buyers to qualify for the exception to the early distribution tax penalty.

Part Four—Once a Lifetime: The home down payment exception to  the early distribution penalty is allowed once during taxpayer’s lifetime.

Summary:If a taxpayer who qualifies as a First Time Home Buyer takes a distribution from an IRA for a down payment and the distribution is $10,000 or less, then the distribution should be early distribution penalty free.  If the taxpayers are married and both qualify as First Time Home Buyers, they both can individually take a distribution for up to $10,000 ($20,000 total).

In most cases,this distribution will be taxable. To make this distribution tax free, taxpayers must meet the above criteria (to eliminate the Early Distribution Penalty) and take distribution from a ROTH IRA and meet all ROTH IRA distribution requirements.

Photo by Thgusstavo Santana from Pexels