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<< know that the new tax law allows penalty-free IRA withdrawals for the purchase of a first home.
However, I am not sure whether:

1) The funds must have been held in the IRA for a minimum amount of time to qualify for
penalty-free withdrawal, e.g., 5 years>>

Nope...no time limitation...either in a regular IRA or a Roth IRA.

<< 2) The withdrawal is a taxable event>>

You bet it is...
For a regular IRA, the withdrawal is always a taxable event. But for a Roth IRA, it gets a little more complicated. If you have the Roth IRA open for a five year tax period, the distributions for a "first time home buyer" appears to be tax free.

Here is some additional information that might be of interest to you regarding the first time homebuyer issue.

Penalty Free Early Withdrawal of IRA Funds for First-Time Homebuyers

It's not often that you can take an early withdrawal from your IRA account and avoid the dreaded 10% penalty. But, surprisingly enough, this is one of the tax benefits enacted as part of the 1997 Taxpayer Relief Act legislation to help people become homeowners.

The new law, effective in 1998, allows individuals to receive distributions from their IRAs to pay up to $10,000 of first-time homebuyer expenses without incurring the 10% early withdrawal penalty that usually applies to withdrawals from an IRA before age 59 1/2. BUT, even though the penalty is waved, you will still be required to pay taxes (as applicable) on the IRA withdrawal itself.

In an odd twist of government logic (is there really such a thing?) you should know that a "first-time homebuyer" doesn't really have to be a first-time homebuyer, since the law defines "first-time homebuyer" simply as someone who has not owned a home for two years. So instead of benefiting just "first-time" homebuyers, the law also helps "not-recent" homebuyers. And in yet another twist of government logic, you can take advantage of the provision even if you are not the first-time homebuyer, since the first-time homebuyer can be the IRA owner, his or her spouse, or any of their children, grandchildren or ancestors. So should this provision be called "Penalty Free Withdrawal for Not-Recent Homebuyers, or Relatives of an IRA Owner"? You be the judge.

Anyway, the $10,000 limit is a lifetime limitation on the amount of withdrawals that can be pulled out of the IRA penalty free under the first-time homebuyer provision. So don't think that you'll get this relief each and every time you want to buy another home. Once you use up your $10,000, you're done. And while the law isn't clear, it seems permissible that, for example, a husband and wife helping one of their children scrape together a down payment can each withdraw up to $10,000 from their respective IRAs without incurring any penalty for early withdrawal.

So be careful who may be looking over your shoulder when you're reading this.


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