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Need clarification re: 10K taken from IRA as "first-time" homebuyer

My wife and I bought our first-ever house in June 2009. We were told that we are allowed to tap into her IRA (traditional) and take out up to $10,000 from there without any penalties for the downpayment as she has never done that before.

We are now doing our taxes and on the 1099-R that she got, they list in box 1 the amount of 10,000.00 and then box 2b is marked "taxable amount not determined". Distribution code in box 7 is "1" with the IRA/SEP" box marked with an X.

My question is this: The $10,000 that we got from there, is it taxed as regular income? I thought that since we are using these monies to buy a house that it is not taxed and not penalized.

I am not sure, but the more I read about it, I think that the $10,000 is added to whatever income we had and the only benefit is that we are not penalized on the "early withdrawl".

Can someone please confirm / clarify this?

Thanks so much!

========================================= MODERATOR'S COMMENT: You have it correct. Up to a lifetime max of 10,000 can be taken from an IRA without penalty if used within 120 days to purchase a new home. The income is fuly taxable, or partially taxable if you have ever made any nondeductible IRA contributions, as recorded on Form 8606.

Reply to
Mystiky
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That is unfortunately the case. You only save the $1,000 10% penalty; you still owe the perhaps $2,500-$3,500 federal tax (plus state tax) on the $10K. But the $8K first-time home buyer credit will offset that. You'll need to complete Form 5329 to show that you qualify for the exception from the penalty tax.

Reply to
Tom Healy CPA

Thanks for the reply. Now, a follow-up:

"partially taxable if you have ever made any nondeductible IRA contributions"

What would be or qualify as non-deductable contribution? My wife always had about 8% of her salary go into her 401k. After she left that job after 5 years, we took that money and converted it into a Rollover IRA. I make stock trades from it from time to time (some winners some looser), but no other money was ever added.

Where does that put us?

Reply to
Mystiky

Distributions are fully taxable.

Phil Marti VITA/TCE Volunteer

Reply to
Phil Marti

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