Qualified Roth withdrawal for first time home

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    Question on a Roth IRA owner who is a few years away from 59.5 but would like to take a withdrawal from her Roth IRA to use towards a first time home (she has not been an owner of her home for about 5 years) that currently has about $60K of basis and a value of about $124K, and she has held and contributed the max each year since 2001 or so. If I’m reading the form 8606 correctly, it appears as though if she takes the $10K withdrawal on line 19 and enters this same $10K on line 20, then after subtracting the two on line 21 enters 0. Then per the instruction, enters her basis of, lets say $60,000 on line 22 and then STOPs with no more entries.

    Am I to assume that in making this withdrawal, it has come from the earnings and her basis is left untouched with this $10K withdrawal?



    Alan S.

    Bruce, yes, but with a hitch. There is no reason to enter a figure on line 20 and waste the one time 10k limit for no benefit unless the intended withdrawal will exceed the basis of 60k, since a 60k or lower distribution will be non taxable coming from the line 22 regular contribution basis under the ordering rules.

    This “first home” exception is easily the most confusing provision of the Roth distribution rules.

    Per Form 8606, if 10k is entered on line 20, using up the one time limit, and the total distribution is 10k or less, it all comes from earnings, tax free and the basis remains 60k.

    HOWEVER, this distribution of earnings without tax or penalty does not carry over to the next distribution, because the 8606 instructions indicate that the next distribution will reflect a basis of 50k, a reduction of 10k in basis. What this means is that the prior distribution remains tax free, but going forward the basis drops 10k, and the earnings balance is restored to what it was before, assuming no further gains or losses. Therefore, if the Roth is not going to be closed for good, that 10k is just treated as tax free earnings for purposes of that one year, not for purposes of a permanent reduction of earnings while maintaining all the basis. In the future the basis of 60k becomes 50k. Accordingly, there is no reason to even enter a figure on line 20 unless it is needed to reduce taxes on the distribution. In this case, that would be a distribution in excess of 60k.

    However, say the Roth owner need a 70k distribution. In that case entering the 10k on line 20 will result in a total of 70k being distributed tax free, so in that case there is at least a temporary benefit.

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