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Roth IRA-first time home buyer

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fancydancer

Junior Member
What is the name of your state? New York

We've already closed on our house, but we're just getting ready to pay the closing costs on our second mortgage, which is an intra-family loan. I just withdrew money from my Roth IRA to cover these costs. Since the mortgage is tied to our first time home purchase, will it be penalty-free? Or will I still have to pay the 10% since we've already closed? How will the IRS know that the money was withdrawn after closing?
 


LdiJ

Senior Member
What is the name of your state? New York

We've already closed on our house, but we're just getting ready to pay the closing costs on our second mortgage, which is an intra-family loan. I just withdrew money from my Roth IRA to cover these costs. Since the mortgage is tied to our first time home purchase, will it be penalty-free? Or will I still have to pay the 10% since we've already closed? How will the IRS know that the money was withdrawn after closing?
There are no tax ramifications or penalties for withdrawing money from your Roth IRA. However, you also cannot replace the money once you have withdrawn it. Therefore you need to think carefully whether or not its best to use your Roth IRA money for the purchase.
 

tranquility

Senior Member
But, didn't he earn any money on that money when it was in the Roth? He gets tax-free income without penalty even if there isn't an exception or if it hasn't been in the account isn't at least five years old?

OP, how much did you put in the Roth and how long ago was that?
 

FlyingRon

Senior Member
Tranq is touching on an important issue. The earnings (but not the contributions) are taxable as ordinary income unless they are BOTH a qualified distribution (of which the first time home buying is one) and the money has been in the plan for five years. Note that when you pull things from the Roth, the government computes it as if you pulled the contributions first and then whatever earnings have accumulated.

The other slightly non-obvious is the 5 years are 5 tax years (but I won't get into that unless you really want to hear about it).
 

abezon

Senior Member
1. With a Roth, the money you contributed comes out first; earnings come out last. Because you did not deduct the contributions, they are not taxable income when you withdraw them.

2. Earnings will also be tax free IF you are over 59 1/2 AND you had the Roth open for more than 5 tax years. Otherwise, any earnings are taxable.

3. Taxable earnings are subject to a penalty for early withdrawal unless you meet one of the exceptions, of which buying your first house is one. You can withdraw up to $10,000 of earnings (over & above principle) to cover closing costs, and need not make the withdrawal before closing, but may need to make it reasonably close to closing. I haven't checked that particular subtlety recently.

So, dig out all your Roth records to find out if you withdrew any earnings at all, then pay taxes on the earnings, but file Form 5329 to except them from the 10% penalty.
 

fancydancer

Junior Member
OP here, thanks for the info. I've had the money in for over 10 years, and it is all contribution, not earnings, so I'm less concerned about taxes than the penalty, since we've already closed (although only about 2 weeks ago). It's really just the withdrawl after closing that I'm concerned about, but again, I'm not sure how anyone would be able to tell. All in all, though, the info you've all given me is helpful.
 

efflandt

Senior Member
Read "First home" on page 53 of http://www.irs.gov/pub/irs-pdf/p590.pdf which is referenced on page 63 about qualified distributions from a Roth IRA. Also see "Ordering rules for distributions" on page 65.

But since you are just withdrawing contributions (not gains or conversions seasoned less than 5 years), it should not matter what you use the money for. Contributions have already been taxed and can be withdrawn at any time without penalty. You just lose the future tax free compounded growth of that money (which could be significant if you knew how to invest).
 

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