Roth IRA – First-time home purchase
FACTS:
Roth IRA >5 years
Total Roth IRA = $36,500
Contributions = $23,950
Earnings = $12,550
Daughter wants to make a withdrawal of $15K toward First-time home purchase. Does this withdrawal automatically come from the $23,950 contributions or can it be applied to $10K of earnings + $5K from contributions. There is no difference for tax purposes, but wanted to know if the ordering rules apply here (Contributions first).
The reason I’m asking this questions is it would be advantageous for her, in this situation, to be able to use the earnings of 10K allowed toward First-time home purchase because this may be the only time she would qualify as a first-time home purchaser and also that there would be more money left in the contribution portion for future withdrawals if necessary before reaching age 59.5.
I could not find anything in Publ. 590 where it stated the 10K allowed for first-time home purchase could apply to earnings first. Seems the ordering rules of contributions first would apply.
Any help would be appreciated.
Permalink Submitted by Alan - IRA critic on Thu, 2013-02-28 17:58
What happens depends on the how much daughter enters on Form 8606 as a qualified first home purchase. That amount is treated as a qualified distribution before the usual ordering rules kick in. But the way Form 8606 works in future years does NOT make this an opportunity to permanently erase 10,000 of earnings tax free (unless the entire Roth is drained). Otherwise, when the next 8606 is done, the amount of earnings applied in the first home distribution results in a basis reduction of regular contributions, ie the earnings snap back into the Roth (subject to interim gains/losses). This is done via the chart in the 8606 Inst. for use with the line 22 instructions. Therefore, unless she is going to close out the Roth entirely, she should ignore the first home 10k (save it for later), and just use the ordering rules under which she gets 15k tax and penalty free. The IRS does not even attempt to explain this in Pub 590, but to prove it, you would have to run this example through Form 8606, then add a later year distribution to see how her basis is reduced by the amount previously listed on the form as a qualified first home purchase.