If I contribute to a Roth IRA for the next few years (maxing out contributions each year), and in 4 years I end up taking it out for a house, what sort of taxes would I be responsible for? Would I be able to pull out my original investments (without gains) without any taxes?
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Join the ROTH IRA Conversation - Your Questions Discussed
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Hi NMoon,
If you are a first time homebuyer you can pull out your original contributions plus up to $10,000 of your earnings (interest, dividends, capital gains, etc.) from your Roth IRA without paying the 10% penalty or ordinary income taxes.
You must complete IRS Form 8606 to report this transaction on your tax return. If you remove more than your original contributions plus the $10,000 first time homebuyer exemption you may have to file Form 5329 to calculate the 10% penalty on the excess premature distribution.
Here are some resources for you:
http://www.irs.gov/pub/irs-pdf/f8606.pdf IRS Form 8606
http://www.irs.gov/pub/irs-pdf/i8606.pdf IRS Form 8606 Instructions
http://www.irs.gov/pub/irs-pdf/p590.pdf IRS Publication 590 (IRAs)
Best of luck and happy holidays!
Pursuant to Internal Revenue Service guidance, be advised that any federal tax advice in this communication, including any attachments or enclosures, was not intended or written to be used, and it cannot be used, by any person or entity for the purpose of avoiding penalties imposed under the Internal Revenue Code.
You are correct. A little known fact of the Roth IRA is that you can withdrawal your CONTRIBUTIONS without taxes or penalties (contributions have already been taxed).
If you take out MORE THAN you have contributed then you will owe income taxes plus a 10% early withdrawal penalty.
There is an exemption for withdrawing from a Roth IRA to buy a first house, but it is very limited. The max amount is $10,000, and there are lots of other details:
First home. Even if you are under age 59½, you do not have to pay the 10% additional tax on up to $10,000 of distributions you receive to buy, build, or rebuild a first home. To qualify for treatment as a first-time homebuyer distribution, the distribution must meet all the following requirements.
It must be used to pay qualified acquisition costs (defined later) before the close of the 120th day after the day you received it.
It must be used to pay qualified acquisition costs for the main home of a first-time homebuyer (defined later) who is any of the following.
Yourself.
Your spouse.
Your or your spouse’s child.
Your or your spouse’s grandchild.
Your or your spouse’s parent or other ancestor.
When added to all your prior qualified first-time homebuyer distributions, if any, total qualifying distributions cannot be more than $10,000.
Also, you cannot just withdraw principal. When you withdraw, they will give you the same ratio of principal and earnings that are currently in your account. Discuss this with a paid financial advisor. It is very easy to make a mistake doing this. If you do it right, you will only have to pay normal income taxes on the earnings portion of the withdrawl. If you make a mistake, you might have to pay 10% of the entire withdrawl as a penalty, in addition to the income tax.
I hope this helps.
Short and sweet- I am in the exact situation you are (looking to buy a house over the next few years) and I have a Roth IRA that I contribute to yearly. My research tells me that I can take out up to $10,000 from my IRA as a FIRST TIME home buyer without paying any penalty. According to my research, you will not be able to pull out your original investments without paying a 10% penalty tax on them, which stinks, because you’ve already paid taxes on that money! Double taxation at its finest.
If you will be over age 59 1/2 in four years (which I am guessing you will not be), it is a whole different story. You will NOT be penalized for taking out your money.
An IRA, Roth or otherwise, is NOT the proper vehicle with which to save for a house down payment. Keep savings for such an item in regular bank accounts.
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