The first home exception for a Roth IRA requires a 5 year holding period for a Roth IRA, but this only matters with respect to tapping earnings tax free.

If the client’s first Roth IRA existed before 2008, then the 5 year holding period has been met and earnings up to 10,000 are tax free.

However, if the client has no Roth IRA now, but will create one for the Roth 401k transfer, the client can still remove up to the amount of his contributions to the Roth 401k tax and penalty free from the Roth IRA and use that for the first home. Any earnings he might have had in the Roth 401k are also treated as earnings in the Roth IRA, and he cannot take out earnings without tax (but no penalty) on the earnings. But perhaps taking out his contributions only will be enough for him. The Roth IRA rollover is still better for him because if he took distributions directly from the Roth 401k, any earnings would be a pro rated portion of each distribution and be subject to tax and penalty on the earnings. But from the Roth IRA, his contributions come out PRIOR TO any earnings and there is no penalty for a qualified first home purchase.

If he has a TIRA account, distributions for a qualified first home purchase are taxable, but the penalty is waived.

The first home exception is probably the most confusing aspect for IRAs and particularly Roth IRAs because:
1) Penalty exception is limited to 10,000 lifetime for qualified first homes (for each spouse), but NO exception applies for distributions from a 401k plan, just IRAs
2) Tax free distributions of earnings are limited to Roth IRAs only if they meet the 5 year holding period, otherwise normal Roth IRA ordering rules apply, ie contributions come out first and earnings last.
3) If client shows first home purchase on Form 8606 for a Roth distribution, he has used some of his 10,000 lifetime limit, sometimes for no benefit.

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