Roth IRA Withdrawal Rules to buy First Home

Dear Tax Talk,

I have a Roth individual retirement account that has been open for three years (I'm age 26). I would like to withdraw my contributions (around $5,000) for the purchase of my first home. I have been finding mixed information regarding penalties on this sort of transaction. What are the Roth IRA withdrawal rules to buy a first home? Will I have to pay a penalty to withdraw contributions for the purchase of a first home since the account has been open for less than five years?

My second question concerns earnings versus contributions. I have roughly the same balance in my Roth IRA as what I contributed to it. Some investments have gained money and some have lost money. Will it allow me to take out up to the total contributions, despite some gains and losses on the individual investments?


Dear Jen,

The mixed information you are getting is probably because people are confusing a Roth IRA with a traditional IRA. The good news is that with your Roth IRA, you can withdraw your principal contributions at any time without a tax penalty. This is not the case with a traditional IRA. Someone at your age withdrawing their principal from a traditional IRA would be subject to federal, state and local taxes plus the 10% early withdrawal penalty. Remember, your income is taxed before making any contributions to a Roth IRA. So your $5,000 principal has already been taxed before going into the Roth IRA. Therefore, it can be withdrawn at any time without paying any additional tax or penalty.

The five-year rule you mention refers to distributions of any nonprincipal Roth IRA withdrawals. The money that you contribute is considered a principal contribution, and the earnings that occur in the account are considered nonprincipal amounts. In your case, because of the mix of gains and losses on your investments, this doesn't appear to affect you since your total balance is basically equal to your total contributions. Don't worry about individual gains and losses of the investments; we are only concerned here with total amounts. If you had any gains, you would not be able to withdraw those for your first-home purchase without incurring the taxes and penalties because of the five-year rule.

In order to make a nonprincipal withdrawal from a Roth IRA without incurring any penalties, it must meet the requirements of being a "qualified distribution." The first rule is this five-year rule we have discussed: The money being withdrawn must exceed a five-year tax period. In addition, the distribution must meet one of the following conditions.

Made on or after the date you reach age 59 ½ years of age.    Made after you become disabled as defined by Internal Revenue Service regulations.    Made to cover qualified expenses, such as for education and for first-time homebuyers.    Made to your beneficiary or to your estate after your death.

Important reminder: Any total qualifying distributions for a first-time homebuyer cannot be more than $10,000.

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