If you are planning to withdraw the $10,000 from your traditional IRA to make the down payment on a house, do you have to have completed the withdrawal and placed the money into your checking account before the date of closing? Or can you initiate the process, and if you do not receive the funds before closing, pay those closing and down payment costs from your bank account, and then indicate the withdrawn funds were used for that purpose when it is time to file taxes?

I suggest you talk to the company the custodian of the IRA, and ask if they can indicate the distribution as going to the cost of for a first home, so that when they issue the 1099-R form at the end of the year they will put reason code 09 on the 1099-R. If they won't do this, then next year when you file your taxes you should include form 5329 to show the IRS why you are not subject to the 10% early ithdrawal penalty.

I think you'll be fine even if you don't receive the IRA funds until after the closing - just make sure that the amount you pay out of pocket is at least as much as the withdrawal from the IRA and that you have proper records. Your out-of-pocket costs will include more than just the down payment - things like closing costs, home inspection, mortgage application fees etc are all considered to be part of the cost of buying the home. You must also use the money for these "qualified acquisition cots" within 120 days of receiving the distribution.

Just to be clear - this exception applies to "first time" home owners only. The IRS defines "first time" home owners as people who have not owned their place of residence for at least the previous 2 years.