Non Qualified Distribution from Roth IRAs
2 questions.
Q1) If a 33 year old funds a Roth IRA now for 2010 with a contribution of $5000, can she withdrawal the full $5000 contribution in 2 years if the account value is worth $6000 without any penalty? Does any 5 year rule apply to this?
Q2) Her husband has a Roth IRA that was started in 2005 with a $2000 contribution now worth approximately $2500. He contributes $10,000 in January 2011 (his 2010 & 2011 contributions). In 2012, Let’s assume the Roth IRA is worth $15,000. How much can he withdrawal for a down payment on his first home?
Is it limited to the $10,000 qualified withdrawal exception or couple he do a non-qualified distribution for $12,000 (his total contributions)?
Thanks,
BW
Permalink Submitted by mk foss on Mon, 2010-12-20 18:40
Regarding the first question – a $5,000 contribution withdrawn within the first 5 years of establishing a Roth is tax free. If a 33 year old converted an existing IRA to Roth of $5,000 and withdrew $5,000 2 years later; there would be no income tax but there would be a 10% penalty if no exception applied.
Regarding the second question – you can withdraw $10,000 of earnings from a Roth tax free for a first time home purchase. Since you first recover your contributions tax-free and then your conversions before any withdrawal is deedmed to be of earnings – you can take out a big chunk of money before you are limited by the $10,000.