Identification

• A qualified withdrawal from a traditional IRA occurs only after the account holder turns 59 1/2 years old. Roth IRA qualified withdrawals have two conditions that must be satisfied. The account must be at least five tax years old, as figured from the first day of the first tax year a contribution was made, regardless of the specific date of the contribution. Second, Roth IRAs require that either the account holder be 59 1/2 years old or permanently disabled, or that no more than $10,000 be used for a first-time home purchase. The IRS considers withdrawals that do not meet these requirements early withdrawals.
  
  

First-Time Homebuyers

• For the purposes of early withdrawals from IRAs, the IRS defines first-time homebuyers as people who have had no interest in a main home during the past two years. The previous two years count backward from the date the new home is acquired. For example, if you buy your home on June 15, 2011, you could not have owned a home since June 14, 2009. Also, if you are married, both you and your spouse must qualify as first-time homebuyers for either of you to qualify.
  
  

Function

• When you take a withdrawal for a first-time home purchase, you must use the funds for the home purchase within 120 days or you will not qualify for the exception. The money can be used for either the costs of purchasing, constructing or remodeling the home, or any settlement, financing or closing costs.
  
  

Reporting

• After taking the withdrawal, you must report it on your income taxes. If you take the withdrawal from a Roth IRA that has been open for at least five years, the IRS treats it as a qualified distribution so you only have to report it as a nontaxable IRA distribution. If you take a withdrawal from a Roth IRA that has been open for less than five years, the withdrawal will not be taxable if you only withdraw contributions. Withdrawals of earnings will be taxable. You must file form 8606 to calculate how much of each you are withdrawing. If the withdrawal will be taxable, you must file form 5329 and use exemption code "09" to show you are using the amount to purchase a first home to avoid the 10 percent early withdrawal penalty. If you take the withdrawal from a traditional IRA, the withdrawal will be taxable but you can avoid the 10-percent early withdrawal penalty by filing form 5329 and using exemption code "09" to show you are using the amount to purchase a first home.
  
  

Considerations

• The lifetime limit of $10,000 applies per person, meaning that you and your spouse could each take out $10,000 from your IRAs for a total of $20,000 over your lifetime. In addition, the IRS permits you to use this exception to gift money to a child, grandchild, parent or ancestor as long as you do not exceed your $10,000 lifetime limit. For example, if you only withdrew $4,000 for your first home, at some point in the future you could withdraw $6,000 to help your daughter buy her first home, assuming she meets the qualifications for a first-time homebuyer.