A Roth IRA is an individual retirement account that allows investors who meet the specific requirements to withdraw their earnings free of tax. Though investors do not receive tax deductions when they contribute to the account, they do avoid being taxed upon withdrawal. Normally, a 10% early-withdrawal penalty is enforced if funds are drawn upon before age 59 1/2, but there is an exception for first-time home buyers.
Instructions
1. Open a Roth IRA. One can do this by selecting a broker to assist with transactions. When an investor is ready to open an account, the broker will usually point him to an online application to fill out. Normally applicants will have to print out a page, sign it and mail it in with the first deposit check. Once the account is established, the broker may set up electronic fund transfers so the investor can regularly contribute without having to mail in a check each month.
2. According to Roy Lewis of the Motley Fool, after the account has been open for five years, a first-time home buyer can withdraw from a Roth IRA for the purchase of a home. This withdrawal is considered a qualified distribution, and will not be subject to penalties or income tax.
3. The IRS allows first-time a home buyer to draw up to $10,000 from his Roth IRA to buy a house. This is a one-time allowance that can be applied to one Roth IRA account only. After the $10,000 has been withdrawn for this purpose, there is not a second chance.
4. The $10,000 limit applies to one person and one Roth IRA account. If a couple wishes to buy a house together, the law is vague enough to allow each of individual to withdraw $10,000 from separate Roth IRA accounts to put toward the home purchase, according to Lewis.
5. In order to avoid penalties, the $10,000 qualified distribution must be applied toward qualified acquisition expenses, i.e. building or buying a house, closing costs or finance costs. Payments toward the mortgage loan, home furnishings or repair do not count as qualified acquisition expenses, and will be subject to penalties and taxes.
Tags: first-time home, acquisition expenses, first-time home buyer, from Roth, home buyer, qualified acquisition, qualified acquisition expenses
