How to Use Partial Lump Sum Retirement Funds for the Purchase of a Residence

Coming up with the down payment for a home is an obstacle that can be overcome by using retirement funds. Though retirement accounts provide maximum tax advantages when held until age 59 1/2, there are IRS regulations allowing use of up to $10,000 if you are buying a home. The exception eliminates the 10 percent tax penalty for early distribution, though the distribution is still added to income. To qualify for the exception, you must not have owned a home within the past two years. The home may be for yourself, a child or grandchild.

Things You'll Need

• Retirement plan statement

Instructions

1. Call the retirement plan administrator and request a distribution form. The IRS allows the $10,000 first-time home purchase exception for all types of retirement savings plans including IRA, 401k and 403b plans.

2. Complete the distribution form for the one-time distribution. If you need more than $10,000, you can take it out, though you will have to pay the 10 percent penalty on the additional amount. Sign and submit the form via fax or mail to the retirement plan administrator.

3. Obtain the check for the distribution. Cash it and apply the lump-sum toward the house payment. Maintain all check stubs and escrow papers regarding the payments.

4. File your tax returns indicating the distribution as recorded on the 1099-R sent to you by the retirement plan administrator. If you are not yet 59 1/2 years of age, complete Form 5329 to record the exception and any additional tax penalty owed on the distribution. Penalties are recorded on tax return Line 58, Form 1040. Distributions are added to income on Line 15, Form 1040.

References

• IRS: Topic 558 - Tax on Early Distributions
• IRS: Publication 590 IRAs
• Bank Rate: IRS Rules for early IRA withdrawals