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<<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 What about any amount withdrawn in order to pay the tax on that qualified withdrawal.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 Chicagoland
Tax Guide for Investors
Now featuring Roth IRA information
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