Roth IRA distributions having multiple Roth IRA’s
I am in the process of purchasing a home. I currently own my primary residence so any Roth IRA distributions are non-qualified (i.e. I don’t qualify for the first time homebuyers exemption). Also, I am under the age of 50. None of the other qualifications for exemption apply.
I want to take money from my Roth IRA’s to help with the downpayment.
In account #1, I have both conversion and contribution amounts. This account was opened in 1998 with a $12,000 conversion. Since then, I have made $27,000 worth of contributions. All applicable taxes have been paid with regular, non-retirement savings.
In account #2, I have exclusively conversion money in it. This account was opened in 2006 as a Roth IRA conversion rollover. The amount was $135,000. There have been no contributions made to this account. All applicable taxes have been paid with regular, non-retirement savings.
Since opening account #1 in 1998, I have not taken any distributions from any retirement account.
I want to use $100,000 from my Roth IRA savings as a downpayment for my new home. I understand that for IRS purposes, the order of withdrawal is: first, from contributions….second, from conversions…and third, from earnings. I will not have to dip into the earnings.
I would like to withdraw the entire $100,000 from account #2, and for IRS purposes apply the distribution as follows:
$27,000 against the contributions from account #1 which would be free of taxes and the 10% Federal penalty since the account was opened more than 5 years ago,
$12,000 against the conversion amount from account #1, which again would be free of taxes and the 10% Federal penalty,
then the remaining $61,000 against the conversion amount from account #2, which would be free of taxes, but the 10% Federal penalty would be imposed on the $61,000 since this conversion took place within the last 5 years.
Can I do it this way? Or do I need to make a withdrawal from account #1 in the amount of $39,000 and a withdrawal from account #2 in the amount of $61,000?
Permalink Submitted by Alan Spross on Wed, 2007-10-03 03:02
Yes, you can do it as posted. You can take the withdrawal from any Roth account you wish in the amount you wish, and your decision will NOT effect the taxation requirement. You understand the taxation scheme perfectly. Your tax bill for this will be limited to $6,100. in early withdrawal penalties. You would report the distribution on Form 8606, and your remaining balance would be -0- in regular contributions, $74,000 in conversions and the rest remains earnings.
You must have had a big tax bill for 2006, having made a huge conversion. Are you totally sure you were eligible (the converted amount does not count toward the 100,000 income limit), and does that conversion have positive earnings? I ask this because certain tax characteristics could combine to make it wise to recharacterize all or part of that conversion, and the deadline to do that is in 13 days (10/15/07).
Of course, if your current house sells in time or you get more in loan proceeds than you expect, you do have the usual 60 days to roll some of your Roth distribution amount back to the Roth, and the first dollars of the rollback would be deemed the penalized dollars. But if the deal falls out, you do NOT have the 120 day rollback period, because that only applies to those meeting the first time buyer definition. So don’t take the funds out too soon.
Permalink Submitted by Bob Fox on Wed, 2007-10-03 12:08
Thanks for the reply. I thought that was the case but wanted to make sure. I did have a large tax bill for year 2006, but had enough in savings to cover it. My wife and I were not over the $100,000 MAGI threshold but likely will be this year. That’s why I wanted to convert it all last year. Also, I’d forgotten about the 60 day rule. That may come in handy.