The Tax Impact of IRA Withdrawal for a First-Time Home Buyer

For the purposes of distributions from IRAs, the Internal Revenue Service defines a first-time home buyer as someone who hasn't owned a home in the two years prior to the date of purchase of the home. For example, if you owned a home but sold it five years ago and have been renting ever since, you qualify as a first-time home buyer. If you're married, both you and your spouse must satisfy the test for either to qualify. For example, if your spouse owns a home but you don't, you don't qualify even if you've never owned a home.

The special treatment for IRA distributions for first-time home purchases applies to a maximum of $10,000 over your lifetime. However, the first-time home buyer doesn't have to be you. Instead, you can take a distribution for your grandparents, parents, children or grandchildren. For example, if you withdraw $7,000 to buy your own first home, you could use $3,000 to take a first-time distribution for your son later on.

If you take a distribution from a traditional IRA for use in buying your first home, the exemption exempts you from paying the 10 percent additional tax penalty on early distributions. You will have to pay income taxes on the distribution. For example, if you take a $10,000 distribution to buy your first home and you fall in the 25 percent tax bracket, you'll still owe $2,500 in taxes but you won't owe the $1,000 early withdrawal penalty.

With a Roth IRA, you also exempt your distribution from any 10 percent early withdrawal penalty you might owe on your distribution. However, if you've had your Roth IRA open for at least five tax years before you take the distribution, the withdrawal counts as a "qualified distribution" so the entire amount is tax-free as well. "Tax years" count from Jan. 1 of the first tax year that you made your contribution.