Roth IRA Withdrawal Rules

I’m buying a house soon and need to withdraw some money from my Roth IRA to make the down payment. I’m 41 years old, and I understand that I can withdraw my Roth contributions without penalties or taxes at any age. But what are the rules for withdrawing money that was rolled over from a traditional IRA to a Roth?

The tax and penalty situation is based on order-of-withdrawal rules. When you withdraw money from a Roth IRA, your contributions are counted first, then the conversions, and finally, the earnings. As you mentioned, you can take your contributions tax-free and penalty-free at any time.

You can take the converted amounts tax-free and penalty-free if five calendar years have passed since you made the conversion. Each conversion has its own five-year holding period, and the oldest conversions count first. So any money you converted before 2007 can be withdrawn tax-free and penalty-free in 2012 or later. If you made the conversion less than five years ago, you can withdraw that money without owing taxes, but you’ll have to pay a 10% early-withdrawal penalty.

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After you take all of your contributions and conversions, the rest of the money is considered to be earnings. It is normally subject to taxes and a 10% early-withdrawal penalty if you’re under age 59½ when you take the money.

If you’re a first-time home buyer, however, you can withdraw up to $10,000 in earnings from your Roth IRA without the 10% early-withdrawal penalty, even if you’re under age 59½. You’ll also avoid a tax bill on that withdrawal if you’ve had a Roth IRA for at least a five-year period. If you don’t meet the five-year test, you’ll owe taxes on that $10,000 but not the 10% penalty.

Ask your IRA administrator for help figuring out how much money in your account counts as tax-free and penalty-free contributions and conversions.

See Borrowing From a 401(k) to Make a Down Payment for information about the pros and cons of tapping a 401(k), Roth IRA or traditional IRA to make a down payment. See IRS Publication 590 Individual Retirement Arrangements for more information about the IRA withdrawal rules and exceptions to the penalties.