How to Use Lump Sum Retirement Funds to Purchase a Residence
Diligently contributing to retirement savings through employer plans and IRAs coupled with sound investment choices can build quite a nest egg over the years. Retirement funds are designed to supplement retirement income sources, but how or when you choose to use the money is really a personal choice. The IRS allows distributions prior to age 59-1/2 without penalty for a first-time home purchase. You may also consider taking a loan distribution, accessing capital with no tax consequences.
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Instructions
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Find a home that meets your needs with the help of a realtor. Review the purchase costs with a mortgage lender to determine how much of your retirement account you will need to access.
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Choose whether you are going to take a distribution or loan against the retirement assets. You may use up to $10,000 for a first-time home purchase without incurring the 10 percent penalty. The IRS only allows loans on employer-sponsored plans, not IRA accounts. You may take a tax-free loan for up to $50,000, capped at 50 percent of the 401k or 403b plan, as long as you are still employed.
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Call your IRA custodian and request a distribution or loan form. Complete the appropriate form, sign it and submit it to the custodian. Loans require no credit check and payments are taken directly from your paycheck. No further tax action is required for a loan distribution. Further action is required for early distributions.
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Cash the check. Take the lump-sum distribution and use it toward the down payment or closing costs.
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Obtain the 1099-R the retirement plan administrator sent, stating how much was distributed to you from the plan. Box 2a of the 1099-R states how much of the distribution is taxable.
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File Form 5329, Additional Taxes on Qualified Plans, if you are not yet age 59-1/2. This form calculates the 10 percent penalty on distributions that do not qualify for an exception. The IRS allows $10,000 from retirement plans to be used without penalty toward the purchase of a first home.
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Record any penalties on your Form 1040, Line 58.
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Record the distributed amount (Box 2a) to Line 15, Form 1040, to add the distribution to your adjusted gross income. Even if the distribution is exempt from penalties, it is still added to income unless the retirement plan is a Roth, tax-free plan.
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Tips & Warnings
Distributions taken prior to age 59-1/2, that do not qualify for an exception, pay taxes and a 10 percent penalty. Exceptions have penalties waived, but still add the distribution to gross income.
The first-time home purchase rule defines a "first-time homeowner" as someone who has not owned a home in the previous two years. You can obtain the exception if the home is for yourself, a spouse, a child or grandchild.
References
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