Using Roth IRA for down payment

[Craig Curelop]

Thanks to everyone at BiggerPockets, I got my first deal under contract! 

I've had my Roth IRA for 5 years, but recently rolled it over from Merrill Edge to Betterment. Does anyone know if I can still use this as part of my down payment since the IRA has been active for 5 years? Or can I not use it because I rolled it over?

[George Blower]

@Craig Curelop

The tax treatment of Roth IRA distributions depends on whether the distribution is considered qualified or nonqualified. If a Roth IRA distribution is qualified, all distributed assets are tax-free. If a distribution is nonqualified, some of the assets (generally the earnings) may be subject to regular income tax and a 10 percent early distribution penalty tax.

Tax laws require Roth IRA assets to be distributed in the following order: regular contributions, conversions and retirement plan rollovers, and earnings (IRC Sec. 408A(d)(4) and Treas. Reg. 1.408A-6). New contributions (regular contributions, conversions, and retirement plan rollovers) go into Roth IRAs on an after-tax basis—the Roth IRA owner does not take income tax deductions for these contributions. Contributions, therefore, generally are not taxed when distributed. But pretax assets (e.g., earnings) that are withdrawn as part of a nonqualified distribution are considered taxable income.

Qualified Distributions
A distribution is qualified if the Roth IRA owner satisfies two conditions. First, the Roth IRA owner must meet a five-year waiting period for distributions. This period begins on the first day of the taxable year(January 1 for most taxpayers) for which the Roth IRA owner makes his first Roth IRA contribution (Treas. Reg. 1.408A-6, Q&A 2). The second condition is that the IRA owner meet one of the following penalty tax exceptions (IRC Sec. 408A(d)(2)(A)).

• Age 59½ or older
• Disability
• Death
• First-time homebuyer

Five-Year Period
Each Roth IRA owner has one five-year period starting with the first Roth contribution ever made by the individual—the five-year period is not redetermined for each Roth IRA that an individual owns. Also, if the entire account balance of a Roth IRA is distributed and the IRA owner later makes contributions to a Roth IRA, the five-year period for qualified distributions does not start over with the subsequent contribution.

Nonqualified Distributions
Any Roth IRA distribution that is not qualified is a "nonqualified distribution." In a nonqualified distribution, any pretax assets that are withdrawn are considered taxable income for the Roth IRA owner and will be subject to the 10 percent early distribution penalty tax unless a penalty tax exception applies.