A Roth IRA Distribution to Buy a House

Using your Roth IRA on your first home saves you on taxes.

tax forms image by Chad McDermott from Fotolia.com

Though Roth individual retirement arrangements are intended to help save for retirement, you can use distributions for anything, including buying a house. If you don't meet the qualified distribution requirements, it might cost you extra in taxes and penalties, however. If you take a Roth IRA distribution to buy a first home, your distribution might qualify for special tax treatment.

General Qualified Distributions

If you meet the criteria for a qualified Roth IRA distribution, you can take a tax-free distribution of any size for any reason, including to buy a house. One criterion for taking a qualified distribution from a Roth IRA is that at least five years have passed since January 1 of the first tax year you contributed. For example, if you first contributed during the 2012 tax year, even if it wasn't until April 2013, your five years starts on January 1, 2012. The second requirement is that you must be 59-1/2-years-old or permanently disabled.

Non-Qualified Distributions

If you don't satisfy either of these requirements, you can't take an unlimited qualified distribution to help pay for your home purchase. When you take a non-qualified distribution, you can take out all of your contributions tax-free and penalty-free before you get to taxable distributions. All earnings are taxable and subject to the 10 percent early withdrawal penalty. For example, if you don't satisfy the five-year holding period and have $50,000 in your Roth IRA, $30,000 contributions and $20,000 earnings, you could take the first $30,000 tax-free.

First-time Home Purchases

First-time home buyers may qualify for special tax treatment on their Roth IRA distribution. If you satisfy the five-year holding period and are taking out up to $10,000 for purchasing a first home, the distribution is a qualified distribution that is tax-free. If you're married, each spouse can take out $10,000, for a total of $20,000. If you don't satisfy the five-year holding period, you can use the exception to avoid the early withdrawal penalty. For example, if you were taking a non-qualified distribution of $10,000 of earnings, you would owe only the taxes, not the 10 percent penalty.

First-time Home Buyer Qualifications

To qualify as a first-time home buyer, neither you nor your spouse can have owned a home in the two years prior to buying the new home. If either spouse doesn't meet the requirements, neither spouse qualifies as a first-time home buyer. You're not limited to using the distribution for yourself, however; you can also take the distribution to pay for a first home for your children, grandchildren, parents or grandparents.

Qualifying Costs

Qualifying home purchase expenses include costs to buy, build or rebuild the home as well as the financing and closing costs, according to IRS Publication 590. You must use the money for qualifying costs within 120 days of the distribution. In addition, you're limited to not using the exception for more than $10,000 of distributions over your lifetime. For example, if you used the exception when took out $10,000 to pay for your first home, you couldn't later use the exception to help your daughter buy her first home.