How to Replace a First Time Homebuyer IRA Distribution
Although an Individual Retirement Account is intended primarily for retirement savings, you can take distributions from the account at any time, subject to Internal Revenue Service penalties and taxation. One way to avoid the 10 percent IRS early distribution penalty is to withdraw funds for the first-time purchase of a home. If you took this distribution in error, or if you otherwise need to replace the money, there are procedures to redeposit the funds in your IRA.
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Instructions
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Verify that your first-time home buyer distribution was valid. To qualify, the distribution must not have exceeded $10,000, and it must have been intended for qualified acquisition costs of a primary residence for you or your family members who qualified as first-time home buyers.
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Stay within IRS time limits. If you need to replace your first-time home buyer withdrawal, you must do it within 120 days of when you received the distribution. This rule supersedes the traditional 60-day window investors have when they make rollover contributions, which is how this contribution would be characterized for tax purposes.
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Contact your financial services firm. Explain to them that you are returning your first-time home buyer distribution. Normally, firms categorize IRA contributions on your behalf. In order to help avoid potential IRS difficulties, confirm that your deposit is labeled correctly.
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Deposit your funds. The funds should be in the same amount that you withdrew, and they should be credited to the same account.
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Review your Form 1099-R. At the end of the year, you will receive a 1099-R from your financial services firm showing the amount of your distribution. If your firm coded your deposit correctly when you returned the funds, then the distribution code in box 7 should read "2", meaning an early withdrawal made with an exception. If box 7 shows a code of "1" then your distribution was considered an early distribution with no known exception and should be corrected immediately.
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File Form 5329. When you file your taxes, you must compete From 5329 to explain to the IRS the nature of your exception to the 10 percent penalty tax. On line 2 of the form, enter the amount of the distribution which you returned to your IRA. Per form instructions, enter exception code "2" just beneath line 2 to indicate the first-time purchase of a home.
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