This case confirms that the early distribution penalty exception for first time home buyers does not apply to retirement accounts unless they are IRAs, i.e. traditional IRAs, Roth IRAs, SEP IRAs and SIMPLE IRAs.
Highlights of the Case
Comments from RetirementDictionary
If the amount was rollover-eligible
This issue could have been avoided if the taxpayer had rolled over the amount to an IRA, and then made the withdrawal from the IRA. This would have allowed the taxpayer to avoid the 10% early distribution penalty, and the time spent dealing with the IRS and the tax court.
If the amount was not rollover-eligible
If the amount was not rollover eligible, then the 10% penalty could not have been avoided, unless the individual qualified for an exception.
Additional Comments
Taxpayers, who are unsure of how the rules work and when they apply to retirement accounts, may want to consider consulting with a professional who is an expert on the technical rules which govern IRAs and employer sponsored plans. It is possible that the penalty was unavoidable, if – as noted above- the amount was not rollover eligible. However, someone familiar with the rules would have been able to help the taxpayer understand that the first-time home buyer exception does not apply to qualified plans.
Taxpayers who prefer to do their own research can start with the IRS Publications. However, any information obtained from the IRS publications should be verified against the Tax Code or other authoritative source.
For a list of the exceptions and the type of retirement account to which they apply, see Early distribution penalty exception
