I've spent hours going through the IRS site (and other sites) looking for this information with no luck, so I'll try here before paying my accountant to research it:

I know I can withdraw up to $10,000 of my Roth IRA for the purchase of my first home. But the IRS puts a bunch of restrictions on how I can use that money -- it has to be for qualified costs of purchasing, building, or rebuilding my first home, and the money has to be used for that purpose within 120 days of the distribution. I can't, for example, use the money toward paying down my mortgage a month or two after I've bought the home.

What I don't understand is how I'm supposed to document that I've met those requirements. How am I supposed to show that the $10,000 was indeed used for qualified costs? I assume I would need to have a paper trail of where that money went in case I'm audited on this issue; it doesn't look like the reporting forms require it, but I just want to be sure I maintain records that can prove I used the $10,000 for qualified costs.

Has anyone here used the Roth IRA first-time homebuyer provision?

We've done this before, and I'm pretty sure that all you have to do is pull the money within the specified time window before the transaction, and then make sure that you incur a sufficient amount of allowable costs. There were no special reporting forms. It's not like you're getting a bag of 10,000 one dollar bills and you have to prove that those individual bills went toward the house purchase. Rather, you have to make sure you have enough allowable expenses to offset the withdrawal. So in that sense, someone could use a home purchase as an excuse to raid their IRA (i.e., even if you technically have enough money outside the IRA to manage the purchase, you can still exercise the first time homebuyer exclusion). I can't imagine why someone would want to raid their IRA if they didn't absolutely have to, but you could do so and get away with it.

Thanks, I kind of suspected that's how it works but wasn't sure.

This works out well for me because I have two small Roth IRAs that together total just slightly over $10K, and I can't contribute to them anymore because I live in Canada. I checked with the IRS and they told me that my first home can be anywhere, not just in the US, so I'm eligible to exercise the first-time homebuyer provision. I converted them from traditional IRAs to Roth in the 1990s. I'm liquidating them now and will have to pay the 10 percent penalty on the amount over $10K, but I'm only over by about $800 so the penalty will be affordable.

This story turned out kind of amusing:

Because I wasn't really planning to buy a house until next fall, I had to act very quickly to get these two IRAs cashed in -- basically I called the mutual fund companies right after our offer on the house was accepted, about two weeks ago. The checks arrived over the past couple of days. But what I hadn't factored into the equation was the fact that my bank puts a more than 30-day hold on deposited checks that are in another currency from outside the country. These checks were in US dollars, drawn on US banks. So while I was able to deposit them well before our closing date (June 15), I won't actually have access to the money until July 10. The money thus won't do me any good in terms of purchasing my home, but we can use it for some renovations and repairs that we need to do as soon as possible.

Interesting. And you learned a valuable lesson... It's always best to spring for the wire fee if you have any sort of time restrictions -- we ran into something similar last year (though not with the international flavor -- it was "just" a 10 day hold that would've held up our close without the wiring). I'm glad that it worked out for you.

One thing to keep in mind with this is that the $10k limit only applies to earnings.

You can take out your contributions at any time for any reason and you don't have to report a thing about how you used them.

Excellent point. This is really a good news/bad news sort of thing, as it's great to have the flexibility, but there are people out there that need a hefty penalty hanging over their heads to stop them from doing something stupid.

I agree. There was a debate about this the other day on another forum. A FA there ONLY recommends Trad IRAs to his clients because in his experience, over half of his clients take money out of their Roths. I posed that he was doing a great disservice to his clients by assuming that they would be irresponsible and take money out of their Roth rather than educating them on the consequeces of those actions.

The debate was never really settled (the guy didn't come back) but the Roth can be a double edged sword. It has excellent benefits, but if you use all of them you hurt yourself in the long run.

Thanks for that clarification, which in fact is great news for me because it means I won't have to pay a penalty. The two Roth IRAs that I cashed in together ended up being worth close to $11,000, but about $5,000 of that was contributions and $6,000 was earnings so I'm well under the limit. Phew!

Normally I would never raid my retirement savings, but these two accounts were small and I couldn't contribute to them anymore since I moved to Canada, so they were never going to do a whole lot for me (although they did more than double in value over 12 years so that's saying something I guess. I started them as traditional IRAs and then converted them when Roth was created). And getting rid of them has simplified my retirement accounts as well...I still have a 403(b) with TIAA/CREF and a 401(k) with Vanguard plus my RRSP here in Canada, just no more IRAs.

Actually, the rules for conversions are potentially different from straight contributions, especially if you opted to spread the tax hit over years. However, if you did the conversion way back when Roths were first introduced (which is what we did) then you're probably in the clear. I think the conversion has to be in there for something like five years before it can be withdrawn penalty-free, but I'd double check to be sure since I obviously don't remember the finer points myself.

As a followup, here are some of the advantages of a Roth from Wikipedia (not exactly authoritative, but these sounds accurate):

Advantages
* At any time, the Roth IRA owner may withdraw up to the total of his contributions (in nominal dollars).
* If there is money in the Roth IRA due to conversion from a Traditional IRA, the Roth IRA owner may withdraw up to the total of the converted amount, as long as the "seasoning" period has passed on the converted funds (currently, five years).
* Earnings withdrawals become automatically qualified in the tax year the participant reaches age 59.5 or becomes disabled, so long as the account is "seasoned" (established for five or more years).
* Up to $10,000 in earnings withdrawals are considered qualified if the money is used to acquire a principal residence. This house must be acquired by the Roth IRA owner, their spouse, or their lineal ancestors and descendants. The owner or qualified relative who receives the "first time homeowner" distribution must not have owned a home in the previous 24 months.

Thanks, and yes I did know about the "seasoning" period and my Roths were indeed well-seasoned, as it were

The interesting twist in all this is that your first home can be anywhere in the world. I couldn't find anything in the code that explicitly addressed this so I called the IRS and spent quite a while on the phone with them; they called me back and said they couldn't find anything that would prevent my from using my Roth IRA to help my buy my first home in Canada, and the spirit of the law is more to encourage home ownership among Americans rather than specifically for people to buy homes in America. That said, I can't enjoy one of the big benefits of home ownership that I would if my home were in the US: in Canada you can't deduct mortgage interest from your taxes!

To follow up on Nickel's clip from wiki, here is a link to an article I wrote about Roths which covers most of the bennies.

What's so great about a Roth IRA?