<<I understand that QUALIFIED Roth IRA withdrawals prior to age 59 1/2 that exceed your contributions are subject to tax but not a penalty. What about any amount withdrawn in order to pay the tax on that qualified withdrawal. Is that subject to both the tax and the penalty? For example, a $10,000 Roth-IRA withdrawal used for a "not so recent" homeowner's (2 years) purchase of a home is subject to tax but no penalty. What about withdrawal of the funds to pay that tax?>>You're in the right ballpark but missing some of the details.A distribution (withdrawal) that meets the definition of a qualified distribution is free from both tax and penalty. To have a qualified distribution you need to satisfy the five-year test *and* meet one of the four "type of distribution" tests. One of those is the new "first-time homeowner" which you accurately refer to as the "not so recent" homeowner. So you can withdraw earnings from a Roth IRA tax-free to buy a new home is you qualify as a "first-time homeowner" and have satisfied the 5-year test.If you fail to meet the five-year test but *do* meet the "type of distribution test," your distribution is not a qualified distribution. In that case you will indeed pay tax on the portion of the distribution that represents earnings (the amount in excess of your contributions). But you won't pay a penalty because you meet the "first-time homeowner" test. You would get the same result if you were over 59-1/2 and withdrew earnings from your Roth IRA before satisfying the 5-year test.Sorry, but there's no rule that permits a penalty-free withdrawal to pay tax on another withdrawal, even if the other one is penalty-free. Seems like that would be a sensible rule, but for now at least it's not part of the law.A discussion of distribution rules for Roth IRAs was recently added to the Fairmark Press web site (see below).KAT in Chicagolandwww.fairmark.comTax Guide for InvestorsNow featuring Roth IRA information
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