When can I withdraw from a Roth IRA for a home?

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investor1
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Joined: Thu Mar 15, 2012 8:15 pm

When can I withdraw from a Roth IRA for a home?

Post by investor1 » Sat Mar 24, 2012 11:30 am

Hello,

I am considering opening a Roth IRA, and I would like to understand something about it before I decide where to put my money.

I'm in my late twenties and currently rent. I would like to prepare myself to be able to put down 50k-75k on a home in roughly three years. I have a savings plan which will put me at 50k in about three years (already have 8k and am putting aside $800/month). In addition to that, I am considering max'ing out a Roth IRA each year (5k/year).

I know I am allowed to withdraw my contributions from a Roth IRA, and I know that I am allowed to withdraw up to 10k (contributions + growth, if I haven't contributed more than 10k) for the purpose of buying a home. I also know there is a rule where the account must be open for five years to withdraw funds. However, I am not clear on how that rule applies to contributions and/or buying a home.

I have found conflicting (or at least unclear) information regarding this online. I also spoke to an individual financial adviser about this. His response was that I can withdraw contributions whenever I want (for anything, regardless of how long the account has been open). My roommate spoke with a different financial adviser and received the opposite feedback (the account must be open for five years before you can withdraw anything).

Bogleheads, can you please provide clarity?

Here is the scenario I gave my financial adviser:
Let's say my Roth IRA has been open for three years. I have max'ed out my contributions each year (total contributions = 15k), and my investments have grown a total of 5k bringing the account balance to 20k. Now, I want to buy a home. How much am I allowed to withdraw from my Roth IRA for my home without penalty/taxes?

Thanks for your help!
Last edited by investor1 on Sat Mar 24, 2012 2:25 pm, edited 2 times in total.

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momar
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Re: When can I withdraw from a Roth IRA for a home?

Post by momar » Sat Mar 24, 2012 12:29 pm

Direct contributions can be withdrawn any time. Only rollover, converted contributions are subject to the 5 year seasoning period.

The $10k for a house is for earnings, not contributions.

To answer your question, you can withdraw the entire amount.
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pkcrafter
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Re: When can I withdraw from a Roth IRA for a home?

Post by pkcrafter » Sat Mar 24, 2012 2:19 pm

You can withdraw 15k without penalty or tax. If you withdraw the entire 20k, you have no penalty, but you will pay tax on earnings because you've held the IRA less than 5 years/59-1/2. Reference:

http://www.kiplinger.com/columns/ask/ar ... /q0713.htm

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

investor1
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Joined: Thu Mar 15, 2012 8:15 pm

Re: When can I withdraw from a Roth IRA for a home?

Post by investor1 » Sat Mar 24, 2012 2:29 pm

pkcrafter wrote:You can withdraw 15k without penalty or tax. If you withdraw the entire 20k, you have no penalty, but you will pay tax on earnings because you've held the IRA less than 5 years/59-1/2. Reference:

http://www.kiplinger.com/columns/ask/ar ... /q0713.htm

Paul
That's what I thought. Thanks for the source!

Alan S.
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Re: When can I withdraw from a Roth IRA for a home?

Post by Alan S. » Sat Mar 24, 2012 3:19 pm

In your example, if you also have a traditional IRA of at least 5,000 and the Roth IRA of 20,000 with a basis of 15,000 from regular contributions, you would be better off to withdraw your Roth basis of 15,000 tax and penalty free and take the other 5,000 from your traditional IRA.

In this situation where your Roth is not qualified with respect to the first home purchase because you have not held it 5 years, you will pay tax on the 5,000 earnings but not the penalty. This is the same amount you will pay if you take the 5,000 out of your TIRA, ie. you will pay tax but no penalty because you can use the first home exception up to 10k to waive the penalty for a TIRA as well as a Roth IRA.

If you can withdraw for the same cost from either type IRA, you would be better off to use the TIRA for the 5,000 and you will end up with 5,000 preserved in your Roth IRA. With your current savings rate I would guess that your modified AGI is too high to deduct a TIRA contribution so you may not have a TIRA or a former 401k to roll to a TIRA. If you cannot deduct the TIRA contributions and still qualify for Roth contributions, then keep making the Roth contributions since they are always preferable to a non deductible TIRA contribution.

To claim this penalty exception on your tax return you will need to complete Form 5329 for the 5,000 taken from your TIRA and enter exception code 09 on line 2. You would also do this if you took 5,000 in earnings from your Roth IRA to waive the penalty.

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