Taxes on Roth IRA Withdrawals and Home Purchase

by Jane Meggitt

Contributions to Roth individual retirement accounts, or IRAs, are made with after-tax dollars. The withdrawal of contributions are free from taxes as long as the account has been established for at least five years. Withdrawals of earnings prior to age 59 1/2 or if the account has not been open for five years are subject to tax as ordinary income, plus a 10 percent early withdrawal penalty. However, if the withdrawals are made for a first-time home purchase, the first $10,000 is tax-free and the additional penalties waived.

Roth IRAs

As of 2011, individuals meeting certain adjusted gross income (AGI) limits may contribute up to $5,000 annually to a Roth IRA if under the age of 50, and $6,000 if 50 or over. Unlike traditional IRAs, the IRS does not have a mandatory age for Roth IRA withdrawals, and account owners need never take distributions. For 2011, the AGI limit for a single filer is under $107,000 to contribute fully to a Roth IRA, and between $107,000 and $122,000 for a partial contribution. Married couples filing jointly with an AGI of under $169,000 may fully contribute, and partially contribute if the AGI is between $169,000 and $179,000.

General Early Withdrawal Penalties

In most cases, early withdrawals from a Roth IRA incur taxes on earnings and an additional 10 percent tax on the earnings amount withdrawn prior to age 59 1/2. Amounts withdrawn and replaced within 60 days are not subject to tax and the additional penalty. In addition, Roth IRA owners may make tax-free withdrawals from the current year's contributions if done before the due date for filing that year's federal tax return.

First-Time Home Purchase

As long as the Roth IRA account has been open for a minimum of five years, the owner may withdraw up to $10,000 without any tax or penalty to pay for expenses related to buying or building a first home. In cases of married first-time home buyers, the dwelling must be the first home purchase for both spouses to qualify. Withdrawn funds may be used for home financing and related settlement and closing costs.

Other Withdrawal Exceptions

In addition to the first-time home purchase, the IRS permits IRA withdrawals without the additional 10 percent tax penalty if the funds are used for higher education expenses for the account holder, spouse or children, and for medical expenses exceeding 7.5 percent of the owner's adjusted gross income. Account owners who withdraw funds at less than the minimum age do not have to pay the penalty if legally declared totally and completely disabled.