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Hello 1Student1:
...but am still fuzzy on whether or not you can withdraw from a Roth within 5 years for a first time home purchase. It sounds like you can withdraw your contributions without any penalty, but would have to pay tax on the earnings if they were withdrawn within 5 years.

Not only would you be taxed at your marginal tax rate, but also pay a 10% early withdrawal penalty as well.

My sister is 25 and has yet to start saving in an IRA or 401(k). In addition, she would like to purchase a home in the next 2 years. Would it be wise to still open a Roth now, take out her conributions in 2 years and leave the earnings there?

She's permitted to remove the contributions, but what type of investments will she be putting this money into? I certainly hope not equities. Any money needed within a 5 year period should not be in the market. She's liable to go to withdrawal her money, and not have what she put in. Can you imagine what her IRA would look like now if 2 years ago she invested in QQQ? She wouldn't be able to buy a dog house.

Could she accomplish that without penalty?

On the contributions, yes. She could always fund the Roth, and let the money sit in their money market, provided your account is with a broker. Even bond funds could lose money in a 2 year period. She needs to preserve this money. A CD of money market mutual fund should be where it rests, IMHO.


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