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 Basics of Roth IRAs

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 So any money you converted before 2007 can be withdrawn tax-free and penalty-free in 2012 or later.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.

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.