We recently withdrew around $35,000 from our personal contributory IRA to purchase a new home. Current IRS tax law says that up to $10,000 can be withdrawn penalty free for first time home buyers. We still have to pay federal income tax on the ten grand, but do not have to pay the 10% early withdrawal penalty provided our IRA custodian properly codes box 7 on the 1099-R form.
Our IRA custodian, Charles Schwab, did not enter a code of J in Box 7. A code of J indicates the IRA early withdrawal will be used for a first time home purchase for you or a relative.
We use Turbo Tax and it will detect the code J in the 1099-R form and automatically generate form 5329 which will get you off the hook with respect to the 10% penalty for withdrawing before age 59 and 1/2. We called Schwab and for some reason this year many 1099-R Forms were marked 1 in box 7 which indicates a normal IRA. They are in the process of amending our erroneously coded 1099-R form which will save us 10% of $10,000 or $1000 on this years tax return.