1ST TIME HOME BUYER
Someone converts IRA Rollover to ROTH in 2010–now wants to take $10,000 as a first time home buyer–also has contributory ROTH since 2008–is he allowed, as a first time home buyer, to take money tax and penalty free from conversion or does the 5-year rule prohibit this? I assume he can take all his contributions (after tax dollars) to the contributory ROTH, thus $10,000 as a first time homebuyer might work here–I assume tax and penalty on earnings. Thank you!
Permalink Submitted by Alan Spross on Thu, 2012-05-17 18:18
The first time homebuyer tax rules are by far the most confusing and complex with respect to Roth IRAs.
The planning issues here are whether to apply the lifetime 10,000 limit per IRA owner or not to apply it. Obviously, the amount of funds needed as compared to the current structure of the Roth IRA is the central factor.
1) If not applied by not entering a first homebuyer amount on Form 8606, the usual ordering rules apply. The taxpayer’s regular contributions come out first, tax and penalty free. Then the 2010 conversion money is distributed assuming 2010 is the oldest conversion. The amount of 2010 conversion distributions is not subject to the penalty. See use of Form 5329 below.
2) In this case, the taxpayer will not have held a Roth IRA for 5 years until 1/1/2013. Therefore, before that date the taxpayer cannot enter any qualified first time buyer expenses on Form 8606. However, let’s assume it is now 2013 and taxpayer chooses to distribute his regular contributions of 5,000 and also 7,000 from the 2010 conversion. He would enter 7,000 on Form 8606 and save the other 3,000 for another time. The 7,000 would come out tax and penalty free.
Now here is where things get tricky. While this taxpayer has not held the Roth for 5 years and cannot enter qualified distributions of Form 8606 for 2012, the taxpayer can still use up to 10,000 to waive the 10% penalty. However, they would use Form 5329 to claim the penalty exception for the amount coming from the 2010 conversion. What this means is that even though the taxpayer has not held his Roth for 5 years and cannot access earnings tax free, he can still get the 10% penalty waived by using Form 5329 AS LONG AS he meets the requirements for a first time homebuyer.