As you have seen, the Roth IRA first home exception is by far the most complex feature of Roth distribution taxation. The tax free earnings (up to 10k lifetime) get premature qualified distribution status (first home is treated similar to reaching 59.5) if you input the 10k (or some lesser amount) to Form 8606. However, without claiming the first home 10k on Form 8606, the taxpayer still benefits from the Roth ordering rules under which the balance of regular contributions comes out first and conversions second. Any conversions done within 5 years will be subject to penalty, but the first home exception up to 10k can also be used to waive that penalty using Form 5329 and entering the first home exception code 09. Taxpayer might not need to tap the Roth earnings in the first place, but if he does and continues to have a Roth balance later on, his future basis is reduced by 10k per the 8606 instructions which effectively restores the earnings amount back to his Roth. This could cost him in any later distribution, but if he holds the Roth until 59.5, those earnings become tax free again. The point is that entering the 10k OTHER THAN as a penalty exception on Form 5329 could have later repercussions, so I would not enter it other than on Form 5329 unless it is needed for the Roth distribution amount desired. The IRS has never explained this, you have to run an example through the 8606 instructions to illlustrate it.

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