Is the $10k limit for Roth IRA withdrawals to buy a home a limit for earnings or also for contributions? If I close a $12k Roth IRA to buy a home is $2k penalized?

[paloma625]

I've had the Roth IRA for more than 5 years and it's not through my employer. The mutual fund won't let me take out just $10,000 - they said I can take out 10% or 90% of the total $12k

[dmertz]

"The mutual fund won't let me take out just $10,000 - they said I can take out 10% or 90% of the total $12k "

Are you sure that the mutual fund company wasn't referring to the tax-withholding amount rather than the gross distribution amount?  The law requires that a default of 10% be withheld for taxes, but the law also allows you to specify zero tax withholding or more than 10% tax withholding.  Some IRA custodians limit the tax withholding to less than 100% of the distribution.

[paloma625]

The mutual fund company wouldn't give any tax advice so I don't think they were referring to the tax withholding amount. (Or are you referring to the contributions I made to the IRA?)

[dmertz]

If mutual-fund company truly limits the amount of your gross distributions, you can move the account by trustee-to-trustee transfer to another custodian that permits unlimited distributions.

Also, even if the mutual-fund company requires you to receive a distribution of more than you need (which I really doubt), you can roll the unneeded portion over to another Roth IRA within 60 days of the distribution as long as you have not done another IRA rollover within the 12 months ending on the date of this distribution.

[Critter]

It might be what the IRA is invested in that has distribution limitations ... some annuities have strict rules.

[dmertz]

I though of that, but that would probably be an odd investment for someone under age 59½ to make at a "mutual-fund company."

[dmertz · Accepted solution]

Presumably you are under age 59½, otherwise any distribution is tax and penalty free since you have had a Roth IRA for more than 5 years and there would be no need to use the first-home exception at all.  Your original Roth IRA contributions (and amounts converted to Roth more than 5 years ago) are distributed first tax and penalty free, so it's unnecessary to apply the first-home penalty exception to that portion of a Roth IRA distribution.  Assuming that you have made no recent Roth conversions, the first-home exception only needs to be applied only to the earnings that come out after your original contributions.  Because you've had a Roth IRA for more than 5 years, the first-home exception will make the first $10,000 of earnings distributed be tax and penalty free.

[Critter]

If you are under the age of 59.5 and you touch the earnings then yes, it will be subject to a penalty ... see the rules here : 

https://www.irs.gov/publications/p590b#en_US_2016_publink1000231057

[paloma625]

I don't see where the IRS publication says whether the $10k limit applies to contributions as well as earnings. Investopedia (of course not an official source) says the $10k limit applies only to earnings since you can withdraw your own contributions from a Roth IRA at any time since they have already been taxed: <a rel="nofollow" target="_blank" href="https://www.investopedia.com/articles/personal-finance/110415/can-you-use-your-ira-buy-house.asp">ht...>