Penalty to withdraw from a new Roth IRA for first time home buyers?

Question

My wife & I are 28 and plan on purchasing our first home in the next 1-3 years.  Right now our assets are in two places:

403-b that I will not touch for the next 30+ years
FDIC-insured savings account earning 1% interest

I have the option to start a Roth IRA account under a fund that offers a guaranteed 3% return.  My understanding of Roth IRAs is limited, but I understand that first time home buyers can withdraw $10,000 ($20,000 joint) to purchase a new home.  However, are there any restrictions to taking this money out?  It's unclear to me if a 5-year "seasoning" period applies to first time homebuyers (ie. would we incur a 10% penalty for withdrawing up to $10,000 ($20,000 joint) on a Roth IRA that is less than 5 years old?)

Thanks for Alex B for suggesting that I migrate this question from here.

Alex B · Accepted Answer

Roth IRAs divide your withdrawal into 3 categories: Contributions, Conversions, and Earnings.
This is significant, because each have different tax consequences and the order of withdrawal is dictated by tax law.

Contributions - First to be withdrawn.  This is the money you invested and has already had taxes paid on it.  No taxes will need to be paid on it.
Conversions - Second to be withdrawn.  This is money converted from a traditional IRA and does sound like it applies in your question.
Earnings - Last to be withdrawn.  This is investment gain made from contributions and conversions.

You can withdraw your contributions in less than 5 years for any reason (home buyer or not).
You cannot withdraw your conversions or earnings without waiting 5 years unless you pay the 10% penalty.  The home buyer exemption is only after the 5 years are met.
Further detail: home purchase exemption, withdraw contributions, early withdrawal penalties.

Eric Petroelje · Answer

You may withdraw your contributions to a Roth IRA at any time for any reason without penalty.

Any gains you withdraw may be subject to tax or penalties though, but there is a $10,000 exclusion (from the 10% penalty, not the taxes) for a first time home purchase.

Penalty to withdraw from a new Roth IRA for first time home buyers?

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