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 Post subject: Roth IRA Contributions for House Closing Cost
PostPosted: Tue Apr 02, 2013 7:21 am 

Joined: Fri May 15, 2009 6:12 am
Posts: 27
So I have put a very small amount of money into my Roth IRA to use, if needed for some of the down payment/closing costs. I also recently rolled over my old 401k (only about $1.5K) to my Roth about 2 months ago. I was under the impression that a first time home buyer can use up to $10k in contributions towards the down payment or closing costs. I called the IRS yesterday to make sure that I will be able to use the rolled over contributions as well.

After speaking to the IRS, I found out that the Roth has to be open for at least 5 years, which mine has not, to be able to take contributions out early tax/penalty free. But it was determined after giving the IRS rep. some information that the distribution would be a non-qualified distribution but still tax/penalty free. I confirmed with him again that i would not be penalized even though it would be described as a "non-qualified" distribution and he said yes.

Is this correct? The distribution is "non-qualified" but I still would not be penalized (tax or early withdrawal penalty)?


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 Post subject: Re: Roth IRA Contributions for House Closing Cost
PostPosted: Tue Apr 02, 2013 9:00 am 

Joined: Fri Sep 12, 2008 12:29 pm
Posts: 1633
Location: Seattle, WA
akim1220 wrote:
After speaking to the IRS, I found out that the Roth has to be open for at least 5 years, which mine has not, to be able to take contributions out early tax/penalty free.


This article will help you: http://www.obliviousinvestor.com/roth-ira-withdrawal-rules/. It has a flowchart!

You can always take out your normal (direct) contributions, regardless of when you put them in or what reason you have for taking them out.


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 Post subject: Re: Roth IRA Contributions for House Closing Cost
PostPosted: Tue Apr 02, 2013 12:59 pm 

Joined: Fri May 04, 2012 2:23 pm
Posts: 867
akim1220 wrote:

After speaking to the IRS, I found out that the Roth has to be open for at least 5 years, which mine has not, to be able to take contributions out early tax/penalty free. But it was determined after giving the IRS rep. some information that the distribution would be a non-qualified distribution but still tax/penalty free. I confirmed with him again that i would not be penalized even though it would be described as a "non-qualified" distribution and he said yes.

Is this correct? The distribution is "non-qualified" but I still would not be penalized (tax or early withdrawal penalty)?


The person you spoke to from the IRS is correct regarding a non-qual distirubtion. There are 2 "5 year rules" as they apply to roth IRA's. 1) to take a qualified distribution and 2) to make a non-qual distribution from a conversion.

Where you and/or the IRS agent are getting mixed up is, you are able to withdraw $10k of EARNINGS from a Roth IRA (or any IRA for that matter) to purchase a "1st home." THIS IS A QUALIFIED DISTRIBUTION, which means, a Roth IRA account must have been open for at "5 years" (technically, you could open an account on 12/31 of a year and get credit for the account being open the entire year).

If you made a contribution directly to a roth IRA (no conversion), the contribution amount (aka basis) can be withdrawn tax and penalty free at any time. Earnings are a different story.

Please be aware, there is a basis recapture or clawback in subsequent years if a Roth IRA qualified distribution is made under the 1st time homebuyer provision. In other words, your basis (and thus your "contribution amount") will be reduced by the amount you withdraw in a previous year, even though it comes from "earnings" in the year in which you took the distribution.

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