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Does this mean that updating kitchen counters, bathroom cabinets, dining room floor, and painting the interior of the house, all very much needed, are not allowable uses of an early SEP withdrawal in conjunction with buying first house?

The exception to which you refer, in order to avoid the 10% surtax, is contained in IRC §72(t)(8) --- Qualified First-Time Homebuyer Distributions. The key word here is "homebuyer". In order to be qualified you must not have owned a home in the previous 730 days & you must be purchasing (or constructing --- not remodeling) a home and further, you must contract to purchase or actually purchase that home within 120 days of making the withdrawal. Meet all these rules & you will escape the 10% surtax.

Note: I made no mention of "tracing" the cash from the withdrawal from the SEP into the closing papers of the home purchase. Therefore, if you just happened to be buying a home; and just happened to take $10k from your SEP ($20k if marreid) and additonally, just happened to purchase a new kitchen there would be no problem; e.g. when you bought the remodeled kitchen for $XXXX did you use SEP dollars or did you use the dollars you had already saved? No one knows & no one cares.

I suggest you read §72(t)(8) --- it is only 1 page & also read the summary in Pub 590 pp 20-21 (2000 edition).


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