06 Oct Help kids buy a home with a Roth IRA

Q. I know I can take money from my Roth to buy a new home. Can I do it to help with a new home for my kids? And what other reasons can I take the money out without a penalty?
— Mom

A. The rules for Roth IRA withdrawals vary depending on your age and the length of time you’ve held the Roth account.

If you’re over age 59 ½ and you’ve had the Roth IRA account for at least five years — measured from the date you made your first contribution — you can withdraw as much as you want for any reason and it would be considered a “qualified withdrawal,” meaning, there will be no taxes or penalties, said Jeff Rossi, a certified financial planner with Peak Wealth Advisors in Holmdel.

If you’re under age 59 ½, or if you’re over 59 ½ but haven’t met the five-year rule, you can still withdraw funds without penalties or taxes, he said.

“The amounts you have contributed to a Roth can be withdrawn at any time, at any age, for anything,” he said. “It’s your money, you’ve already paid taxes.”

Roth IRAs have specific “ordering rules” for distributions which require that any amounts contributed get distributed first, followed by conversions and rollover contributions, then by earnings, he said.

“What this means is if you contributed $10,000 years ago, and the account has grown to $15,000, an $11,000 distribution will be comprised of $10,000 in contributions and $1,000 in earnings,” Rossi said. “If you’re only withdrawing your contributions, there are no taxes or penalties.”

Distributions for a home purchase for your kids is permissible and will be considered qualified, he said, as long as it meets certain criteria for a first-time home buyer.

The buyer of the home must be a first-time home buyer, Rossi said.

“A first-time buyer is when there was no main home ownership during the last two-year period ending on the date of acquisition of the home which the distribution is being used to buy,” he said. “If your child is married, their spouse must also meet this requirement.”

The withdrawal can’t exceed a total of $10,000 for all of your kids and it must be used to pay costs related to acquiring a home within 120 days of taking the distribution. For this reason, Rossi said, be careful about giving a child a gift from your Roth IRA if a first-time home purchase is a ways off.

“There are several types of exceptions that will allow you to take a non-qualified withdrawal without incurring penalties such as being totally and permanently disabled, or unreimbursed medical expenses exceeding certain gross income thresholds,” Rossi said.

A full list of IRA distribution rules is available on IRS Publication 590-B.

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This post was first published in October 2016.