How do you prove you used IRA money for home purchase?

August 4, 2006 7:10 AM

Tax laws allow you to withdraw money penalty-free from your IRA up to $10,000 if you use it towards a first-time home purchase. We just got the check -- my question is, how do we prove later on that we did use the money for the house?
posted by boognish to Work & Money (14 answers total)

Well, I imagine you would declare the real estate taxes and mortgage interest that you didn't have as deductibles the year before, that would be their first clue.
posted by blackkar at 7:16 AM on August 4, 2006

I borrowed from my 401K for our home purchase, and as I recall I just had to provide a copy of the signed Purchase & Sale agreement - I didn't have to show a trail of the actual cash, if that's what you're asking.

I'd assume your 401K provider should have their requirements documented. (if you can't find anything, I'd start with your HR person, if they don't know they should know who to ask.)
posted by jalexei at 7:32 AM on August 4, 2006

Ahh, misread slightly - in terms of taxes, satisfying your 401K provider requirements should be sufficent for them to classify and report the money accurately (ie. non-taxable).
posted by jalexei at 7:34 AM on August 4, 2006

The withdrawal is taxable, there is just no early withdrawal penalty (10%).
posted by blackkar at 8:15 AM on August 4, 2006

A 401K isn't really the same thing as an IRA. It's the IRS you need to satisfy to waive the 10% penalty, not the plan provider. I pulled money out of my IRA for medical bills this year, and I held on to the cancelled cheques for proof. I don't plan to send in the cancelled cheques, though-- I'd just claim the exemption on the appropriate tax form and you have the bill of sale as proof if you're ever audited.

Go to the IRS's web site and search on IRA early distribution and see if there's a special form you need to fill out.
posted by astruc at 8:31 AM on August 4, 2006

Open up a separate account to deposit the check in & don't commingle any other funds with it. Draw the payment on that account when you purchase the house. Keep all records. Voila!
posted by Pressed Rat at 8:41 AM on August 4, 2006

Open up a separate account to deposit the check in & don't commingle any other funds with it. Draw the payment on that account when you purchase the house. Keep all records. Voila!

This should work, but seems to be more effort than should be necessary.

You'll be asked on your tax return next year if you bought a home. The correlation of your "yes" answer (and all the junk you have to fill out along with it), the amount of your down payment on the home, and your withdrawal from your IRA should be proof enough, unless you had $100,000 in your savings account freely available to you, took out $10,000 from your IRA, and made a $20,000 down payment, deeming the withdrawal from the IRA rather unnecessary.
posted by twiggy at 8:45 AM on August 4, 2006

You need to find out how your financial institution recorded the withdrawal. If you told them it was for the house, they probably recorded it as first time homebuyer. The closing statement will show that you brought $10,000.00 or whatever amount to the table, and that should match up to your withdrawal. Also, because you're withdrawing from your IRA, you will get a 1099-R and the transaction will show there, but I wouldn't wait til then to see how it was recorded and try to get it recorded properly. We didn't make people send in the purchase and sale agreement to do the classification, but your bank/provider might (where the IRA is). I would keep a copy of the check for myself and then once the deal's been done, you might be able to get a copy of the cleared check, which will probably show that the attorney cashed it.
posted by Medieval Maven at 9:23 AM on August 4, 2006

The withdrawal is taxable, there is just no early withdrawal penalty (10%).

Thanks, yes - that's what I meant -
posted by jalexei at 9:39 AM on August 4, 2006

Two things bit me when I did exactly what you're planning. Here's how to avoid them:

1. Set aside money to pay taxes on your withdrawal. 30% should do it.

2. Check if the financial institution that holds your 401k/IRA is required to withold a certain amount (usually about ~20%). If so, you'll want to take a larger withdrawal so that you have enough to cover your costs.
posted by electroboy at 10:19 AM on August 4, 2006

Just a reminder - if you take out a larger withdrawal to cover the taxes, you will pay a 10% early withdrawal penalty on the difference. The withdrawal is taxable to the federal, state, and local authorities.

A lot of people get caught up in the great idea of doing this, but forget they are required to pay the tax - you don't walk away with $10K of your own money, you walk away with ~$7000. Think about whether it is worthwhile to take the tax hit now vs. the possibly increased interest rate you are charged if you don't have a full 20% down. If you are doing this to get around PMI, many mortgage companies will let you have 2 loans up front, an 80% mortgage and another home equity loan to cover the difference. Many people find it easier to pay bills than to save money for retirement.

All of the above answers are assuming this is not a Roth IRA. If the disbursement is from a Roth, you can withdrawal the original amount you deposited early without any penalty, but any amount earned above the original deposit is taxable.
posted by blackkar at 12:40 PM on August 4, 2006

I did this for my first time home purchase. Using TurboTax, I filled out all the stuff regarding my IRA disbursements. At that point TurboTax warned me that some of it is taxable. Some point later in the program it asked what I did with the money and one of the check boxes was something like "first time home purchase." I checked the box and the early withdrawal penalty went away.

Note: I think people make way too big a deal about the early withdrawal penalty. In the grand scheme of things, paying a 10 percent penalty today is a lot cheaper than paying 30 years worth of interest on the same amount.
posted by GarageWine at 2:04 PM on August 4, 2006

... paying a 10 percent penalty today is a lot cheaper than paying 30 years worth of interest on the same amount.

Not necessarily. As a simple case, if you keep $1000 in your IRA and earn 6% and instead borrow $1000 for your mortgage at 6%, they are exactly offsetting. The interest you earn in the IRA exactly balances the interest you pay on the mortgage. But if you withdraw from your IRA, you end up paying 10% more.
posted by JackFlash at 4:21 PM on August 4, 2006

Best answer: Boognish, you typically just need to file Form 5329 with the IRS to show that you have an exception for the 10% penalty. I don't think you need to provide actual proof that the money was used for a first-time home purchase unless you get audited.

Keep in mind that you may also need to pay state income tax on that amount depending on your state's laws.
posted by titanshiny at 8:08 AM on August 5, 2006