A:

If you converted the funds less than five-years ago, you will not be able to meet the qualified distribution requirements. However, the amount you distribute for use toward the acquisition of a first home will not be subject to the 10% early-distribution penalty. Furthermore, if the amount is less than the amount you converted from your Traditional IRA to your Roth IRA, the amount will also be tax free. For example:

  • If you converted $10,000 or more and you distribute $10,000 for your first-time home purchase, the full $10,000 will be tax and penalty free.
  • If you converted $9,000 and you distribute $10,000, the additional $1,000 is counted as earnings and subject to income tax, but the $9,000 will be tax and penalty free.

In order for the transaction to be a qualified distribution, you must have had a Roth IRA for at least five years, and you must meet one of the following requirements:

  1. Be at least age 59.5
  2. Be disabled
  3. Be using the assets to purchase a first-time home
  4. Be receiving the distribution from a Roth IRA that you inherited from a deceased Roth IRA owner

Remember that the maximum amount that is eligible for the penalty-free treatment for a first-time home purchase is $10,000. This is a lifetime limit.

For more information on a qualified distribution, please see Tax Treatment Of Roth IRA Distributions.

This question was answered by Denise Appleby
(
Contact Denise)

RELATED FAQS

  1. How is market value determined in the real estate market?

    Learn how fair market value is determined during a real estate appraisal and how market values are really decided by professional ...
  2. Does my employer's matching contribution count towards the maximum I can contribute ...

    Maximize 401(k) contributions on your own without fear; employer contributions are separate and do not hinder you contributing ...
  3. How much will an employer generally contribute to a 401(a) plan?

    Find out how much employers may contribute to an employee's 401(a) retirement plan and why this amount can vary so widely ...
  4. When can benefits be received from a provident fund?

    Find out when participants in provident funds can begin receiving benefits, including how funds can be used to finance important ...
RELATED TERMS
  1. Qualified Longevity Annuity Contract

    A Qualified Longevity Annuity Contract (QLAC) is a deferred annuity ...
  2. Fair Housing Act

    This law (Title VIII of the Civil Rights Act of 1968) forbids ...
  3. See-Through Trust

    A trust that is treated as the beneficiary of an individual retirement ...
  4. Backdoor Roth IRA

    A method that taxpayers can use to place retirement savings in ...
  5. Construction Loan

    A short-term loan used to finance the building of a home or another ...
  6. Current Service Benefit

    The amount of pension benefit accrued by an employee who had ...

You May Also Like

Related Articles
  1. Investing

    Where Are Real Estate Stocks Heading?

  2. Retirement

    Does it Make Sense to Have an MLP in ...

  3. Retirement

    Top Tips for Rebalancing 401(k) Assets

  4. Professionals

    Few Target-Date Managers Invest in Their ...

  5. Fundamental Analysis

    Should You Hire an Advisor or DIY Your ...

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!