Roth IRA withdraw
I have a client under age 59.5 that took money out of their Roth for 1st time homebuyer purposes several years ago. Now they want to take a withdraw of their contributions/conversion made more than 5 years ago. Does the homebuyer withdraw count against contributions/conversions, thereby limiting what they can presently withdraw?
Permalink Submitted by Alan - IRA critic on Tue, 2013-01-29 02:52
Basically, the answer is Yes. The Form 8606 instructions for first home distributions allow these distributions to include qualified earnings up to 10,000 and this trumps the usual Roth ordering rules. However, if the Roth is an on going account, the amount of basis is reduced starting in the year following the distribution. Therefore, this exception allows a tax free withdrawal of earnings for the first home, but then the basis is readjusted lower and earnings are restored the next year. Therefore, the client will find out that the prior distribution reduced his future basis in regular Roth contributions that he has remaining for the current distribution and the benefits of the earlier distribution were somewhat temporary. These provisions make the first home exception for Roth distributions the most complex and misunderstood elements of Roth distribution taxation.