First Time Homebuyers & Roth IRA Withdrawal

Besides being great for retirement savings, you Roth individual retirement account can help you buy your first home. However, if you're already 59 1/2 years old and you've had your Roth IRA open for five years, it doesn't matter why you're taking the distribution: You can take it all out tax-free and penalty-free.

Withdrawals of Contributions

Whether you qualify as a first-time home buyer or not, you always get your contributions out tax-free from your Roth IRA. The Roth IRA ordering rules allow you to take out all of your contributions before any earnings come out. Suppose you've put $50,000 into your Roth IRA over the years. You can take out the $50,000 tax-free and penalty-free for your first home (or any other reason).

First-Time Homebuyer Definition

For the purposes of the limited qualified distribution or exception from the early withdrawal penalty for Roth IRAs, you only qualify as a first-time home buyer if you haven't owned your home for the two years prior to buying your new one. If you're married, your spouse must also meet this requirement; otherwise, you don't qualify. As far as qualified expenses, any costs you pay to buy the home or incur in financing fees count.

Qualified Distribution

If you've had your Roth IRA open for five years, you can take a qualified distribution of up to $10,000 to pay for first-time home-buyer expenses. This is a lifetime limit, so if you've already used $9,000 before, you can only use $1,000 this time. If you're married, both you and your spouse can make use of this special treatment, allowing you to withdraw $10,000 each tax-free and penalty-free for a total of $20,000.

Penalty Exception

If you haven't had your Roth IRA open for at least five years, you can claim an early withdrawal penalty exception on up to $10,000 of earnings. You'll still owe taxes on the earnings, but you won't have to pay the 10 percent early withdrawal penalty. The $10,000 limit is cumulative with the limit on qualified withdrawals for a first-time home purchase.

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About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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