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:
- Be at least age 59.5
- Be disabled
- Be using the assets to purchase a first-time home
- 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
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