One of the tax benefits enacted as part of the 1997 Taxpayer Relief Act helps individuals to become homeowners as it allows individuals to receive a distribution of up to $10,000 from their IRAs to pay for a first-time homebuyer expenses.

IRA funds distributed to you must be used to pay qualified acquisition costs prior to the close of the 120th day after the day you received the distribution.

TRADITIONAL IRA – With a traditional IRA the distribution for a first-time homebuyer is allowed without the 10% early withdrawal penalty that usually would apply to a withdrawal from a traditional IRA prior to age 59 1/2. However, although the penalty is waived, applicable taxes will still be due on the traditional IRA withdrawal.

ROTH IRA – Should you take the distribution from a Roth IRA to finance a first-time home purchase, the rules are a little different. A withdrawal taken from a Roth IRA for a first-time home purchase would be considered a “qualified distribution” as long as the account has been open for five tax years.  In this case any distribution taken from the Roth for this purpose would be both income tax- and penalty-free.

Under the "Roth Distribution Ordering Rules", the first money out will be annual contribution money. Annual contribution money is never taxed or penalized. Second out would be any conversion money*, which also is not taxed or penalized as long as it has been in the Roth for the required five tax-years.  Last out are earnings. Due to the distribution rules the only money taken from a Roth IRA that might be an issue would be earnings that have been in the Roth for less than five tax-years.  You would still meet the exception to avoid the early withdrawal penalty, but you would not meet the requirement for a tax-free withdrawal, therefore you would owe ordinary income tax on the distribution.