Tap Into Your Roth IRA Penalty Free With the Roth IRA Home Purchase Exception

Roth IRAs are my favorite savings tool because they are so flexible and they have so many tax benefits. One of the benefits of a Roth IRA is that you can take out up to $10,000 to purchase a new home without paying any tax or penalty. However, there are some rules to follow in order to get the tax-free, penalty-free treatment, so make sure you do your homework before you take a Roth IRA withdrawal.

Who qualifies for the Roth IRA home purchase exception? You must be a “first-time homebuyer” to qualify, but this term is much broader than you might expect. To be a first-time homebuyer, you simply must not have owned a home in the past two years.

The home you are purchasing must be a principal residence for you, your spouse or a dependent of yours to qualify. The penalty exception does not apply if you are purchasing a vacation home or a rental home. However, the home you are purchasing doesn’t necessarily have to be a traditional home. For example, mobile homes and even houseboats qualify as long as it is your principal residence.

The costs used with the funds must be qualified acquisition costs, which basically means the cost of purchasing, building or reconstructing a residence, and can include finance and other closing costs.

How much can you withdraw from your Roth IRA for a first-time home purchase? The amount you can withdraw penalty free is up to $10,000 per individual. That means married couples can withdraw up to $20,000 penalty free to be used towards your home purchase.

There is a time limit on when the funds must be used to qualify. The money must be used to either purchase or build a house within 120 days of the withdrawal. Since closing on a house or building a home can be time consuming it’s important to time your withdrawal carefully.
Other Roth IRA Home Purchase Rules To Be Aware Of

The Roth IRA must have been opened at least five years ago to avoid both the penalty and taxes. If the account has not been open for at least five years, you will still avoid the penalty, but you’ll have to pay income taxes on any earnings you withdraw.

Don’t forget that you can always get your Roth IRA contributions out tax-free at any time. So even if you don’t qualify for the Roth IRA home purchase exception, you can still get your contributions out tax-free to help pay for your home purchase.

Roth IRAs are very flexible investment vehicles, making them a great way to save not only for retirement, but for other financial goals such as college expenses, medical expenses, and first time home-buyer expenses as well. To learn how to take penalty-free Roth IRA withdrawals, please visit http://rothirawithdrawalrules.org

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