In the light of recent events of buying a home, I was thinking about taking some money out of my Roth IRA to pay down some of the closing costs. I was reading on the web and there are a few simple rules to avoiding the 10% penalty for early withdrawal and taxes. Technically, you must meet two of the requirements to receive a qualified distribution. The law now allows individuals to receive distributions from their traditional IRAs to pay up to $10,000 of first time homebuyer expenses without incurring the 10% early withdrawal penalty that usually applies to withdrawals from traditional IRA before 59 1/2. But…
You also may be subject to taxes on the traditional IRA withdrawal itself. The rules for taking a distribution from a ROTH IRA to finance a first-time home purchase are different than those for a traditional IRA. Remember, a first-time home buyer is anyone that hasn’t owned a home in two years. That is why there is a $10,000 lifetime limit on withdrawals. To withdraw from a Roth IRA, it is considered a qualified distribution after the account has been open for five tax-years. That is not the same as 5 calendar years.
All in all, you do not typically want to do this because the compounding of interest is just too great. Don’t take my word too seriously, but do what you have to, only you know what you really need.
