Withdrawal from ROTH for Home purchase
Son (27 year-old) has approx. $20,000 in Roth IRA – First Contribution made in 2003 – No conversions
$15,000 Contributions; $5,000 earnings — Can he withdrawal $18,000 to use for home purchase without any tax and/or penalty; or can he only withdrawal up to the $15000 he contributed; or only up to the $10,000 home purchase exception?
Since the IRA is over 5 years I’m pretty sure he can withdrawal up to his contribution without any tax and/or penalty. Therefore, couldn’t he make a withdrawal for $8,000 (his money), then withdrawal $10,000 ($7,000 his money + $3,000 earning) for home purchase exception.
What are the tax and/or penalty implications for an $18,000 withdrawal?
Thanks
Permalink Submitted by mk foss on Tue, 2009-11-03 19:10
A ROTH IRA owner can take out 10,000 of earnings without penalty for a first time home purchase. The earnings come out after his contributions – there is no income tax or penalty in the situation you describe.
Permalink Submitted by Alan Spross on Tue, 2009-11-03 22:56
This is one of the more mind boggling issues in reporting Roth distributions.
SInce the Roth has met the 5 year holding requirement, any amount up to 10,000 lifetime is available to use for the first home exception, and the amount elected is treated as a qualified distribution, and comes out prior to any non qualified distributions under the ordering rules. This is not well explained in Pub 590, and therefore, Form 8606 must be checked to determine the outcome.
In this case, when 18,000 is the desired distribution, there is only a benefit in treating 3,000 as qualified expenses. The other 7,000 can be saved for another time.
You would have 3,000 treated as a qualified distribution, therefore tax and penalty free, and then the ordering rules would kick in for the other 15,000. The other 15,000 is also tax and penalty free, but is still a non qualified distribution. The end result is that no taxes or penalties are due, and 7,000 is left for use in a later purchase that meets the definition.
If he only needed 15,000, there is no benefit to even claiming the first home distribution because he can get the 15,000 tax and penalty free.
Note that if he were to show 10,000 on line 20 of Form 8606, he would be using up his entire lifetime first home benefit with no additional tax savings. While he would be applying all 5,000 of his earnings to the distribution, this would NOT leave him with a higher basis in subsequent years than just using 3,000. The explanation for this is in the Inst for Form 8606, line 22 on p 8 of the Inst. He has no basis left in his Roth for future years either way. The 2,000 that remains is earnings.
While the IRS has not clearly ruled, it appears that the taxpayer has the election to apply any amount of earnings he wishes to the first homebuyer amount. While he can save some of the exception for future years, he cannot save basis for future years by applying more of the earnings in the current year. This is a very confusing concept, but it means when you get a tax free distribution of earnings, the benefit is only temporary, ie for the actual year of the first homebuyer election.