The 60-Day Rollover Rule for a Home Purchase

Using funds from a retirement account for a home purchase is a financial strategy that allows access to accumulated savings. This approach requires strict adherence to Internal Revenue Service (IRS) regulations to avoid potential taxes and penalties. Understanding the available options and their requirements is the first step in using retirement assets for this purpose.

The 60-Day Rollover Rule Explained

The 60-day rollover rule allows you to withdraw funds from a retirement account, like an IRA, and avoid taxes and penalties if you redeposit the money into another eligible retirement account within a specific timeframe. This process is an indirect rollover because you take temporary possession of the funds. The 60-day period begins the day after you receive the distribution, and missing this deadline has significant financial consequences.

This rule includes a “one-rollover-per-year” limitation. This rule, applied on a 365-day basis, permits only one indirect rollover from any of your IRAs to another IRA within a 12-month period. It is an aggregate rule, meaning if you have multiple IRAs, you cannot take a distribution from one and roll it over, and then perform another rollover from a different IRA within the same 365-day window. This restriction does not apply to trustee-to-trustee transfers, where funds move directly between financial institutions without you ever taking control of the money.

Failing to complete the rollover within the 60-day window results in the entire withdrawn amount being treated as a taxable distribution. The funds become part of your gross income for that tax year and are taxed at your ordinary income tax rate. If you are under the age of 59 ½, the distribution will also be subject to a 10% early withdrawal penalty. The IRS rarely grants waivers for missing the deadline, and situations like using the funds for a home purchase that falls through after the 60 days have passed are not considered valid reasons for an extension.

The First-Time Homebuyer Exception

As an alternative to the rollover, the IRS provides a specific exception for first-time homebuyers, which allows for a penalty-free withdrawal from certain retirement accounts. The IRS defines a “first-time homebuyer” as someone who has not owned a principal residence at any time during the two-year period ending on the date the new home is acquired. This definition can also apply if your spouse has not owned a primary home during that same two-year window. This provision allows for a lifetime maximum withdrawal of $10,000 from your IRA without incurring the standard 10% early withdrawal penalty.

While the 10% penalty is waived, the withdrawn amount is not entirely tax-free. If the funds are taken from a traditional IRA, the $10,000 distribution is still considered taxable income and must be reported on your tax return for the year of the withdrawal. For a Roth IRA, withdrawals of contributions are always tax- and penalty-free, but for the earnings portion to be qualified, the account must have been open for at least five years. If both you and your spouse are first-time homebuyers and each have your own IRAs, you can both withdraw up to $10,000 for a combined total of $20,000.

The funds obtained through this exception must be used for “qualified acquisition costs,” which include the costs of buying, building, or rebuilding a home, as well as associated settlement, financing, or other closing costs. These funds must be used within 120 days of the distribution date. If the home purchase is unexpectedly delayed or canceled, the IRS allows you to return the funds to your IRA within that 120-day period, treating the transaction as a rollover and avoiding any tax consequences.

Required Information and Tax Forms

Properly documenting your transaction with the IRS is required. After you take a distribution from your retirement plan, the plan administrator will send you Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. This form details the gross amount of the distribution in Box 1 and the taxable amount in Box 2a. Pay close attention to Box 7, which contains a distribution code; a “Code 1” indicates an early distribution with no known exception, while a “Code 2” suggests an exception may apply.

If you use the first-time homebuyer exception, you must file Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts, with your annual tax return. This form is used to show the IRS that you qualify for an exception to the 10% early withdrawal penalty. You will complete Part I of the form, entering the amount of the distribution and the applicable exception code, which for a first-time home purchase is “09”. Filing this form correctly ensures the 10% additional tax is waived.

The information from these forms flows to your main tax return, Form 1040. The taxable portion of the distribution from Form 1099-R, Box 2a, is reported as income on your Form 1040. If you correctly file Form 5329 to claim the homebuyer exception, the 10% penalty will not be added to your total tax liability. Keeping records, like the closing documents for the home purchase, is important to substantiate your use of the funds if the IRS has questions.