Question: Early IRA Withdraw for Home Purchase
I am currently in escrow selling my current house and purchasing a new house. We unfortunately are running short on closing costs because our appraisal came in low, home repairs, and current stock market killed my deferred compensation.
My wife has $13,500 in a Roth IRA she hasn’t touched nor added to in over 5 years. We were advised to talk to our tax preparer about any penalties we might get taking the money out. Here are the questions I have:
1) $10,000 Penalty Free: I read that we could one time take out $10,000 penalty free, but also read something about first time home buyers only, and must have had the account for over 5 years (which it is). Can we take out the money penalty free? If not how much penalty am I looking at?
2) Income Taxes: Do I have to pay any federal/state taxes? I read that Roth IRA don’t pay taxes, only traditional IRA pay taxes?
Can someone confirm for me questions above and if its advised if we pull out $10,000 from my wife’s Roth IRA? I personally want to take the money out to assist us with the closing costs, and security money since my wife will be out of work for an unknown time till she finds new employment at our new city.
Permalink Submitted by Alan - IRA critic on Wed, 2015-09-02 17:44
Since the purchase is not a qualified first home purchase, she cannot tap earnings in her Roth tax free. However, in many cases this is not necessary since Roth distributions follow “ordering rules”. In order to report the distribution or to know upfront the amount of any tax or penalty, she has to figure out her “basis” in the Roth IRA. Basis come from regular contributions and conversions. The amount of regular contributions she has made come out first and they are both tax and penalty free. Next out come any conversions she has done, the oldest first. Conversions that have been held 5 years also come out tax and penalty free. Conversions less than 5 years are tax free but there is a 10% penalty on the taxable amount of those conversions. Any earnings come out last and are subject to both tax and penalty. Therefore, unless one of you has been keeping track of the amount of contributions, it will take some research to determine how much of her Roth can be withdrawn without tax or penalty.
Permalink Submitted by Chris Jackson on Thu, 2015-09-03 04:45
Thank you. You have all ready spent more time then my tax accountant has who I have paid thousands to in regards to my questions. My wife was given the IRA as a part of a severance pay in 2010 when she was laid off at a medical office, so she never paid into it, she was just given a 13,000$ check to deposit into her own bank into a roth IRA acount. Her 2014 Form 5498 shows the money as “Line 5 – fair market value of account – $13,700.” So her money is at the 5 year mark, so I am assuming she can take it out tax free to help on the down payment of a house.
Permalink Submitted by Alan - IRA critic on Thu, 2015-09-03 19:18
Since the Roth conversion is well over 5 years, she could withdraw 13k tax and penalty free, although it would still have to be reported on Form 8606. The $500 of earnings will not be tax and penalty free until she reaches 59.5. Therefore, if she leaves the 500 in the Roth, there will be no tax or penalty for the distribution, but if she wants to just close the entire account because the remaining balance would be very low, there would be taxable income of 500 and a 10% penalty on the $500 ($50). I assume this is her ONLY Roth IRA.