Hello, I have another question. I am also using an inherited traditional IRA for a first time home purchase down payment. I was told that i can withdraw the entire amount of an inherited IRA at any time without paying the penalty (I think it's 10%). I understand that I will have to pay taxes on the full amount because it is traditional IRA.=====>correct; With an Inherited Traditional IRA, you’ll pay taxes on any distributions you take if you inherit an IRA from someone who is not your spouse at the time he/she dies, the amounts that you receive as a distribution from the IRA will never be subject to any early-w/d penalties. However, amounts you receive will be treated as ordinary income for you and may be subject to income tax. Because money that goes into an IRA isn’t taxed, the IRS takes its share on money when it leaves it. This rule applies across the board with IRAs, so any distributions you take from an inherited IRA are treated the same as if you made a qualifying distribution from your own IRAThe exception regarding distributions used to purchase a first-time home only applies to those IRAs you established and contributed to yourself, not those you inherited. Because the IRA was inherited from someone other than your spouse, there will be Minimum Required Distributions. You, as, non-spousal IRA heir, must withdraw a minimum amount each year, starting by Dec. 31 of the year after the IRA owner died. If you choose to, you can draw out these minimum required distributions over your own expected life span. Or if you want, you may ask your planl adviser to help you re-title or re-register the inherited IRA so you can rollover the assets to your IRA. This re-titling also lets the IRS know that it is an inherited IRA. You need to do this by Sept. 30 of the year after the year in which the original IRA owner died. If you don’t bother to re-title the inherited IRA funds and simply deposit them into your IRA, the money you inherited will be treated as taxable income. Even if it’s a small amount, this tactic is unwise.
since you’re not the spouse, you won’t get taxed on the IRA until after you start making withdrawals.
So, am I correct in assuming that I will only have to fill out an IRA 8606 form, and don't have to worry about the IRA 5329 penalty waiver for first time home purchase====>>You need to fill out Form 8606;unless you start taking your required withdrawals by Dec. 31 of the year after the year the IRA owner died, the IRS will penalize you by taxing the amount you fail to withdraw at 50 %. In order to qualify for this relief, you need to file Form 5329 and attach a letter of explanation.