Can I withdraw money for a first-time home purchase with my accounts?

December 20, 2007 8:43 PM

You can use your Roth IRA for your first time home purchase (up to 10k). However, you must have the account open for 5 years. How is account defined?

I have a Fidelity Roth IRA account open for 6 years now. I have a T.Rowe Price Roth IRA open for 2 years. My wife had a John Hancock Roth 401(K) (open 2 years ago) which we rolled over to a T.Rowe Price Roth IRA when she switched jobs back in August.

The rules stipulate that the account must be open for 5 years? Does this included the general umbrella of the Roth IRA or each single account under the umbrella? We plan on buying a home after I am done with medical school. We were thinking to put some more cash into our Roth's for the time being and wanted the flexibility of withdrawing our CONTRIBUTIONS for a down-payment if needed.

On a side note, can this money be put back or will that count as new contributions? I expect my income level will make me ineligible for contributing to a ROTH after I'm done with the 3+ years of medical school and 4-5 years of residency. Hence, why we are trying to contribute as much to get ahead start.

posted by InvestorMD to work & money (5 comments total)

If you're just taking out contributions, there's no restrictions whatsoever (as far as I can tell). Once the money's out, though, it can't go back in.

From the IRS page on this: "[A distribution is qualifying if] It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit" (emphasis mine). Since this mentions "a" Roth IRA rather than a specific account, it sounds like your funds are OK to use, but not your wife's.
posted by 0xFCAF at 9:22 PM on December 20, 2007

I withdrew $10,000 from my Roth to cover closing costs. It was no biggie -- just a form to fill out and then my investments guy told Schwab to cut me a check.

Uh, call your investments guy. If you don't have one, call T. Rowe Price and 'splain. They'll help you figure it out (and can likely vouch for you meeting the spirit of the law anyway.)
posted by desuetude at 10:05 PM on December 20, 2007

While I don't have the answer, Fairmark just updated their Roth IRA book. They've been the go-to guys for me wrt all this complicated financial crap.

Oh, wait:

"When you meet the five-year test for one Roth IRA, you meet it for all Roth IRAs. For example, suppose you contributed $500 to a Roth IRA in 1998. Three years later you decided to set up another Roth IRA and contribute $2,000. Both IRAs will meet the five-year test on January 1, 2003." [1].
posted by panamax at 10:08 PM on December 20, 2007

Yep, your contributions are your money that you already paid taxes on so you can do whatever you want with it the same as any other income you have paid taxes on. The complex rules only apply to earnings that have accumulated in your Roth since they are untaxed. If you want to also remove the earnings, you apply the 5-year rule to the date of your earliest Roth contribution. All of your Roth accounts are treated as one combined account, and your wife's are separate. In addition to the 5-year rule for distribution of earnings, you must also satisfy the first time home purchase rule to avoid penalties, with a limit of $10K. For withdrawing your own contributions, there is no $10K limit -- it's your money.

So by stuffing the money temporarily in your Roth, you get the benefit of accumulating tax free earnings and can still take out an unlimited amount of contributions later for whatever purpose -- it doesn't have to be a house. If you want to take out the earnings as well, then you have to meet the two rules to avoid penalties and taxes.

You can't put back the money you withdraw later (unlike borrowing from a 401k). For this reason, in most cases I would highly discourage using Roth money for a down payment because you forever lose the benefit of a lifetime tax-free investment. But in your case, since you are a doctor and likely to have a very high income in later years, most of your investments will end up being taxable accounts. Your small Roth today likely won't be a large portion of your retirement wealth anyway in the long run, so go for it.
posted by JackFlash at 10:30 PM on December 20, 2007

Thank you for all your answers. You've greatly cleared up the complex rules that were throwing me completely off on my strategic financial planning. Merry Christmas / Happy Holidays to all.
posted by InvestorMD at 12:01 PM on December 21, 2007