Roth IRA First Home Purchase Withdrawal Rules

What are the Roth IRA first home purchase withdrawal rules?

That's a great question.

If you're in the market to buy, build, or rebuild a home, the IRS allows you to withdraw up to $10,000 (a lifetime limit) from your Roth IRA as a qualified distribution. That means you won't owe any taxes or penalties on the funds withdrawn.

But before you take advantage of this early withdrawal exception, make sure you know the rules...

According to the IRS, in order for an Roth IRA early withdrawal to qualify as a qualified first home purchase distribution, it must meet the following requirements:

1) It must be used to pay qualified acquisition costs before the close of the 120th day after the day you receive the distribution.

2) It must be used to pay qualified acquisition costs for the main home of a first-time homebuyer 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

3) When added to all your prior qualified first-time homebuyer distributions (if any), total qualifying distributions can not be more than $10,000.

Meet these stipulations, and your Roth IRA withdrawal is tax-free and penalty-free. Just keep in mind that all withdrawals must following the Roth IRA ordering rules for withdrawals, and that means original contributions come out first. And since, your original contributions can be withdrawn at any time tax-free and penalty-free, you may not even need to take advantage of this exemption.

That said, let's take a closer look at each factor impacting the Roth IRA first home purchase distribution.

What Constitutes a First Home Purchase?

According to IRS Publication 590, a first-time home buyer meets the following definition...

"Generally, you are a first-time homebuyer if you had no present interest in a main home during the 2-year period ending on the date of acquisition of the home which the distribution is being used to buy, build, or rebuild. If you are married, your spouse must also meet this no-ownership requirement."

So if you've previously owned a house or even several houses, you aren't necessarily out of luck when it comes to taking advantage of the Roth IRA first home purchase distribution.

For instance, let's say that you and your spouse own a home. Following a military transfer, you sell your home and live abroad for 3 years. When you return, you qualify as a first-time home buyer since you haven't maintained an ownership interest in a home for more than 2 years...

Just keep in mind that the closing date and the "date of acquisition" are not necessarily one and the same. According to the IRS, the date of acquisition is the date when:

• You enter into a binding contract to buy the home for which the distribution is being used, or
• The building or rebuilding of the home for which the distribution is being used begins

Whichever event takes place first triggers the start date for the "date of acquisition." So if you're pushing up against the two year limit, do your homework before making a withdrawal.

What Home Purchase Expenses Qualify?

You can't take an early Roth IRA home purchase distribution to cover any home related expenses you wish.

The withdrawn funds can only be used to pay for "qualified acquisition costs."

So what are "qualified acquisition costs"?

According to IRS Publication 590, "qualified acquisition costs" include the following...

• Costs of buying, building, or rebuilding a home
• Any usual or reasonable settlement, financing, or other closing costs

These costs include things such as a down payment, financing related costs, closing costs, and other expenses directly related to the purchase of a first home. These expenses do NOT include upgrades or improvements to an existing first home or paying down a mortgage on an existing home.

For instance, let's say you buy your first home. One month later, you learn about the Roth IRA first home purchase distribution. Since the closing has already taken place, you can no longer take advantage of the exemption.

Why?

Because your distribution needs to be related to "qualified acquisition costs" and since you've already acquired the house, you no longer have any qualifying expenses.

How Much Can You Withdraw?

You can withdraw a maximum of $10,000 to pay expenses related to a first home purchase. However, keep in mind that this limit for the Roth IRA first home purchase distribution has a lifetime cap, meaning you're limited to $10,000 worth of distributions for your entire lifetime.

Not $10,000 per home purchase... Not $10,000 per child... Not $10,000 per grandchild...

Just $10,000 total.

That said, you can withdraw your original principal contributions at any time tax-free and penalty-free for any purpose you wish. So there's nothing to stop you from withdrawing $100,000 for home purchase related expenses if that's what you've contributed to your Roth. But such withdrawals won't constitute a Roth IRA first home purchase distribution, they'll just be regular tax-free withdrawals.

How Often Can You Use Your Roth IRA For Home Purchase Expenses?

You can take advantage of the Roth IRA first home purchase distribution as many times as you want. Just make sure that the lifetime total of your withdrawals does not exceed $10,000.

For instance, you can take four first home purchase distributions of $2,500 for yourself and three children. Or you can take five first home purchase distributions of $2,000 for two children and three grandchildren.

In short, you can take as many distributions as you want, just make sure the grand total doesn?t exceed $10,000.

Who Qualifies for Roth IRA First Home Purchase Distributions?

Not everyone qualifies for the Roth IRA first home purchase distribution. Only the following people are eligible...

• Yourself
• Your spouse
• Your or your spouse's child
• Your or your spouse's grandchild
• Your or your spouse's parent or other ancestor

The term ancestor, as used by the IRS, essentially means any direct descendant from great, great grandparent to great, great grandchild. In essence, the person in question must be a direct line descendant of you or your spouse.

Cousins don't count. Nieces and nephews, brothers and sisters, and best friends also don't count. Only your parents' parents and your childrens' children, etc...

Conclusion

Regardless of whether or not you've reached age 59 ½ or met the 5 year rule, you can take a qualified distribution from your Roth IRA if you're using the funds to pay expenses related to the purchase of a first home.

That means you avoid having to pay income taxes or a 10% early withdrawal penalty on any investment gains you withdraw.

However, to qualify you must meet several criteria and your total Roth IRA first home purchase distributions can NOT exceed the lifetime limit of $10,000.