First-Timer Primer: How A Roth IRA Can Help Buy A House

by UrbanTurf Staff

First-Timer Primer: How A Roth IRA Can Help Buy A House: Figure 1

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 for the purchase of a home, without incurring the 10 percent penalty that typically accompanies an early withdrawal of funds. The law required 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to a Roth IRA or conversion money (funds from other retirement accounts that were rolled into the Roth) are taxed when withdrawn, only the earnings made on those funds.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.

A few final notes. These rules are limited to holders of a Roth IRA, so individuals with a 401(k), traditional IRA or any other retirement account are out of luck. Also, this distribution can only be done once, as the government doesn’t want you dipping into your retirement savings on a regular basis.

Other First-Timer Primers:

This article originally published at https://dc.urbanturf.com/articles/blog/first-timer_primer_down_payment_help_from_a_roth_ira/8049


  1. Charles said at 3:25 pm on Thursday January 30, 2014:
    What are the rules for Inherited IRAs? There is no penalty to pull from an inherited IRA but as a first time home buyer, is there a maximum that can be pulled that will not be taxed?
  1. Max said at 6:57 am on Monday February 3, 2014:
    I thought this posting was going to be about Self Directed IRAs. It is uncommon/not savvy to tout unnecessary withdrawals from one's Roth IRA. I would love to see updates to this article. It dangerously fails to express how devastating it is to your Nest Egg's ending balance to take money out; you're robbing Peter (potentially severely) to pay Paul. The best benefit to a user of a Roth IRA are the tax-free compounding returns. EVERY YEAR HELPS. Withdrawing $10k while youthful is almost equal to skipping two years of contributions and missing out on a lot of Nest Egg money at retirement. I love the UrbanTurf articles, but this one seems shortsighted.

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