A Roth IRA is one of those accounts that people feel is totally off limits until you reach the age of 59 1/2. But that is not entirely true.
A law passed in the late 1990s made it possible for first-time homebuyers to take out a $10,000 distribution from their Roth IRA for the purchase of a home, without incurring the 10 percent penalty that typically accompanies an early withdrawal of funds. The law requires that the IRA must have been open for at least five years.
While the distribution does not result in a 10 percent penalty, the owner of the Roth IRA may still have to pay taxes on the distribution. (The 10 percent penalty and taxes incurred are two different things.)
However, neither annual contributions to a Roth IRA or conversion money (funds from other retirement accounts that were rolled into the Roth) are taxed when withdrawn, only the earnings made on those funds. In other words, if you contributed $5,000 to the IRA and made $2,000 on that contribution, only the $2,000 would be taxed. So, if your Roth has been open for five years, chances are that you can take out the $10,000 without paying any taxes or penalties.
What makes this even a sweeter deal is the government’s definition of a first-timer. It is not just someone buying their first home, but rather anyone that hasn’t owned a home in the previous two years. The $10,000 maximum distribution can only be done once, as the government doesn’t want you dipping into your retirement savings on a regular basis.
- First Timer Primer: How Much Cash Do You Need to Buy a House?
- First-Timer Primer: The Mortgage Pre-Approval Process
- First-Timer Primer: How Do Mortgage Payments Work?
- First-Timer Primer: The Escalation Clause
- First-Timer Primer: A Condo Fee Tutorial
- First-Timer Primer: What is a Rent Back?
- First-Timer Primer: What is an Adjustable Rate Mortgage?
- First-Timer Primer: Taxes and Profit from Selling a Home
This article originally published at https://dc.urbanturf.com/articles/blog/first-timer-primer-how-a-retirement-account-can-help-buy-a-home/18071.
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