My wife and I plan to relocate to Florida. We originally planned to purchase a Florida home in 2022, but because of rising prices we had to accelerate our plans. When went to contract in March 2021, I withdrew money from my IRA for the down payment. Is there any way to lessen our tax liability for 2021? If we had followed our original plan and waited until I retired, I would have been in a much lower tax bracket. We are both over 65. I will retire at the end of the year, and my wife is retired now.
Unfortunately, it sounds as if there's no way for you to avoid taxes on that individual retirement account distribution.
The law waives the 10% early withdrawal penalty on up to $10,000 that's withdrawn from an IRA to buy a first home. But it doesn't waive the tax. Besides, this isn't your first home, and you're not subject to an early withdrawal penalty because you're over age 591/2.
There is another potential way to reduce the tax liability on your withdrawal, says Ed Slott, a Rockville Centre tax accountant, but from what you've described, it won't fit your case. It might help other readers in similar situations, however.
If you had non-retirement account funds available — from the sale of your current home, for example — rolling those funds back into your IRA would eliminate the tax bill. The hitch is the timing: That rollover would have to be completed within 60 days from the day you took the distribution. "And you can only do this 60-day rollover once in a 365-day period," he adds. "So this isn't an option if you've already done one in the last 12 months."
The bottom line
IRA distributions are taxable income.
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