The federal government encourages saving for retirement by deferring income tax on funds contributed (with certain restrictions) to an individual retirement plan until the funds are distributed. An “individual retirement plan” is as an individual retirement account or annuity, which is commonly referred to as an IRA. Generally distributions before age 59 ½ years of age pay an additional 10% penalty, but there are exceptions.
One exception is an IRA distribution that is used for a first-time home purchase. Thus when an individual uses a distribution from an individual retirement plan for a first-time home purchase, he is not required to pay the 10% additional tax.
But beware – Not all qualified retirement plans qualify for the first-time home purchase exception. A taxpayer took a distribution from his 401(k) plan to use for a first-time home purchase. The Tax Court ruled that a 401(k) plan is not an individual retirement plan, so the 401(k) plan distribution used for a first-time home purchase was subject to the 10% additional tax.
This tax case holds that the first-time home purchase exception only applies to IRAs and does not apply to 401(k)s.
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