Qualified ROTH IRA Distributions
I have a Roth IRA with TD Ameritrade (set up in 1999) and have requested from them a distribution of my account in order to buy my first house. Originally when I set up my Roth, I had put money into various stocks, but stopped doing that about a year ago as I’m not very savy in the Stock Market and felt I should just put my money into a “Cash” account. I called up Ameritrade a few days ago to request the proper forms to carry out the distribution of funds from my account (approximate amount $5,500) and was told that I had to check the box that said: Nonqualified Roth IRA distribution- Account owner is under age 59 1/2 and/or it has not been at least five years from the beginning of the year in which the account was opened and funded/converted.
I’m confused as I thought that since my account is well over 5 years old and I am using the money (up to $10,000) to buy my first home that I would qualify for a Qualified Roth IRA Distribution. I was hoping you could shed some light onto this situation for me.
Thank you for your time.
Permalink Submitted by Alan Spross on Fri, 2012-06-22 18:22
This situation is the most complex tax decision for people taking Roth IRA distributions. Basically, you have the option of claiming a qualified first home distribution if you wish, but this is not always an advantage. To claim the first home qualified distribution:
1) 5 years must have passed since the year of your first Roth IRA contribution – you meet this test
2) The purchase must meet all the requirements of a qualified first home
3) The limit to apply here is 10,000 lifetime
4) You must meet the time limits for paying the expenses that are qualified after your distribution (120 days)
5) You must report the distribution correctly on Form 8606 and/or Form 5329
Note that the IRA custodian will NOT code your 1099R to show a qualified first home purchase. If you are not yet 59.5 they will code the distribution as a non qualified distribution and then you would show the amount up to 10.000 that you opt to use for your first home distribution. This would make your distribution tax and penalty free.
Now here is where the complexity comes in. You may not get any advantage from showing the first home distribution vrs just a typical non qualified distribution. Under the Roth IRA ordering rules for non qualified distributions, the first dollars distributed from your Roth are from your regular contributions and these are tax and penalty free. You may have enough from regular contributions to have your distribution tax and penalty free anyway. If you do not, the next dollars out are from your Roth conversions. If you did conversions the ones 5 and years old and older also come out tax and penalty free, but those under 5 years are subject to penalty. You can use your first home exception to waive the penalty. Last out are the earnings and they are taxed and penalized unless you show up to 10,000 on Form 8606 as qualified first home expenses. If you show an amount on Form 8606 for these expenses, the form will apply your Roth earnings tax and penalty free before tapping the other amounts. Note that your 10,000 can be used on Form 8606 to apply the distribution to earnings or separately on Form 5329 to waive the penalty if you have Roth conversions under 5 years. Either way, it counts against your lifetime 10,000 limit.
Your Roth custodian did not give you the correct advice. If they know your Roth has been held for 5 years (and they should know that if they have been the custodian all along) they should know that you could use the first home exception. However, since you are not 59.5, they must code the distribution as non qualified on your 1099R because IRA custodians do NOT issue special coding for first home purchases even if you proved to them how you used the funds. You have to make your own declaration on Form 8606 or 5329. Therefore, they are correct with respect to the box you must check on the distribution form.
I can provide more specific advice if you provide the following figures
1) Amount of your total regular Roth contributions still in your Roth (use the figure for all Roths if you have more than one)
2) Amount of any conversions broken down by those down before 2008 and those 2008 or later
3) The current value of your Roths (your earnings can then be determined as the total value less the total of 1 and 2 above.
Remember, if you took other Roth distributions in the past you have to reduce the above totals by the amounts you took out previously.
4) The estimated total amount you will need from your Roth for this purchase (this could exceed 10,000).