IRA penalty exception-question of the day

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  • KC-CPA
    Member
    • Mar 2012
    • 91

    #1

    IRA penalty exception-question of the day

    Client age 56 withdraws lump sum distribution from IRA (Statement states plan as Individual Retirement Annuity). The original dollars were from an employee retirement plan that she rolled over to this account. (She didn't ask me if she should do this...

    client states: I don't want to pay taxes on that so I used the money to buy a house for my daughter to live in, I invested the money.

    Originally (Yah its late in the season), I was thinking she wouldn't have to pay the penalty because she is over 55, however, that rule only applies to 401K and requires separation of service from employee (she has neither).

    However, I read the exception about buying a house and to my surprise it did say descendent and is up to $10K. So here are my questions.

    She possibly could get a 10K exception because she use the money to buy a house, unfortunately I think the house would probably have to be in her childs name, she bought the house in her own name and has owned her own house for years?

    Unless there is something else I am missing, she probably is going to pay the penalty and income tax on that withdrawal, i don't see any other way around it. Thoughts?
  • FredcpaAZ
    Junior Member
    • Feb 2008
    • 10

    #2
    Originally posted by Roger N
    Client age 56 withdraws lump sum distribution from IRA (Statement states plan as Individual Retirement Annuity). The original dollars were from an employee retirement plan that she rolled over to this account. (She didn't ask me if she should do this...

    client states: I don't want to pay taxes on that so I used the money to buy a house for my daughter to live in, I invested the money.

    Originally (Yah its late in the season), I was thinking she wouldn't have to pay the penalty because she is over 55, however, that rule only applies to 401K and requires separation of service from employee (she has neither).

    However, I read the exception about buying a house and to my surprise it did say descendent and is up to $10K. So here are my questions.

    She possibly could get a 10K exception because she use the money to buy a house, unfortunately I think the house would probably have to be in her childs name, she bought the house in her own name and has owned her own house for years?

    Unless there is something else I am missing, she probably is going to pay the penalty and income tax on that withdrawal, i don't see any other way around it. Thoughts?
    I do not see any way around it, she is not going to like it but them are the rules

    Comment

    • KC-CPA
      Member
      • Mar 2012
      • 91

      #3
      What about the $10K exception for first time homebuyer exclusion for penalty for the house she bought for her child, Does the house have to be in the child's name? or does payments to the parent substantiate it?

      Comment

      • Burke
        Senior Member
        • Jan 2008
        • 7068

        #4
        Originally posted by Roger N
        What about the $10K exception for first time homebuyer exclusion for penalty for the house she bought for her child, Does the house have to be in the child's name? or does payments to the parent substantiate it?
        They are pushing the envelope. Should have put house in child's name. Looks like TP owns and child is paying rent, unless they executed sale with installment agreement. Legally house will be in mother's estate. I guess they had their reasons.

        Comment

        • KC-CPA
          Member
          • Mar 2012
          • 91

          #5
          I am sure you have heard all the reasons before... controlling mother, irresponsible daughter, etc. The more I think about it the more issues there are as there is mortgage interest and property taxes to take. There is no paperwork between Mom and Daughter. They should ask us how to structure if they want to push the envelope.

          Comment

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