[Tax Help for] Early Roth IRA distribution

[DeathAndTaxes]

hello fellow B-heads.

I will try to make this simple

I rolled over a large sum from a Roth 401(k) to a Roth IRA in 2011. The Roth IRA had been open for over 5 years.

In order to purchase a home, I withdrew the entire account balance in 2012. Two parts of this should be tax and penalty free:

* $10,000 that is the lifetime allowance for first time home purchase
* contributions made into the original Roth IRA

I'm getting mixed information on the amount that was rolled over in 2011. Can someone help me to break down how to consider that portion ? I believe some of it should be counted just like a Roth IRA contribution, even though the contributions were made to a Roth 401k (and I've already payed taxes on them). I believe another portion of it is gains that should be taxed and penalized. Any help would be greatly appreciated. !!! Thanks !!

[Alan S.]

Will assume you are NOT 59.5 and therefore neither your Roth IRA or your Roth 401k were qualified. Also, that you have only this one Roth IRA account.

When you rolled over the Roth 401k in 2011, you received a 1099R from the plan. Box 5 of that form that shows the amount of your deferrals to the Roth 401k. That amount is added to your amount of regular Roth IRA contributions for purposes of tracking your Roth IRA contributions. If you ever did Roth IRA conversions, this amount also needs to be determined, but will assume you did not have any prior conversions. If your Roth IRA value is more than these regular contributions, the remaining amount is earnings.

You fully distributed your Roth IRA in 2012. If your Roth IRA has earnings, you would elect to report a qualified first home distribution up to the amount of earnings, but not more than 10k. The result is that for the qualified first home amount you show, Form 8606 considers it a qualified Roth distribution, tax and penalty free. Your balance of regular contributions are also tax and penalty free. If you have more earnings than 10k, the excess is subject to tax and penalty. So first you must determine your balance in regular Roth IRA contributions and then you must complete Form 8606 correctly (or enter the required info into your tax program).

If you did NOT have any earnings at all, you would not even show a qualified first home distribution, you would save your full 10k for the future. Further, if you close all your Roth IRAs for less than your basis, the loss is eligible for a misc itemized deduction subject to 2% of AGI.

If you start another Roth IRA in the future, note that the IRS Regs do not require you to always have a Roth IRA balance. Therefore, your Roth IRA holding period would still be based on the year of your first Roth IRA contribution.

If you did Roth IRA conversions, reporting is more tricky if the conversions were held under 5 years. That's because you are limited to 10k in total for qualified earnings OR waiving the 10% penalty for not holding your conversions 5 years. So if you have conversions under 5 years, please advise.

[DeathAndTaxes]

Thank you for responding. Yes, I am under 59.5. I understand the 10k limit for the home purchase and I understand the tax-free and penalty-free status on regular contributions. My confusion is how to handle the amount rolled over from the Roth 401k into the Roth IRA. The IRA had been open for around 8 years. The Roth 401k had been open for at least 5 years (but I don't believe that matters). I think the questions are:

* Does the amount rolled over count as a contribution (or do I have to somehow determine what portion was contribution in the original Roth 401k?)
* Does a new clock start in 2011 upon the rollover, or does this amount satisfy the 5 year rule because it was rolled into an older account ?

Any tips are greatly appreciated. thanks !

[cherijoh]

Thank you for responding. Yes, I am under 59.5. I understand the 10k limit for the home purchase and I understand the tax-free and penalty-free status on regular contributions. My confusion is how to handle the amount rolled over from the Roth 401k into the Roth IRA. The IRA had been open for around 8 years. The Roth 401k had been open for at least 5 years (but I don't believe that matters). I think the questions are:

* Does the amount rolled over count as a contribution (or do I have to somehow determine what portion was contribution in the original Roth 401k?)
* Does a new clock start in 2011 upon the rollover, or does this amount satisfy the 5 year rule because it was rolled into an older account ?

Any tips are greatly appreciated. thanks !

I think DeathAndTaxes already answered part 1 of your question - the 1099R you received for the rollover tells you your contributions to (i.e., basis in) the Roth 401K - the entire rollover doesn't count since it is a mixture of your contributions and earnings.

Based on my interpretation of this article on Fairmark http://fairmark.com/rothira/roth401k/rollovers.htm:

* Since you aren't 59 1/2 you can only take out your BASIS tax-free + the $10K for home purchase (this matches reply from DeathAndTaxes). Had you been 59 1/2 the entire amount would have been eligible for tax-free withdrawal.

* The 5 year rule is based on how long you held your original Roth IRA. The clock only resets for conversions from traditional IRA/401ks. [This makes sense to me, since I think the reset of the 5 year clock was to close a potential loophole for the 10% penalty for early w/d from trad-IRAs. Otherwise, anyone with a 5+ yr Roth IRA would have been able to avoid the penalty by converting from the trad-IRA to a ROTH and immediately withdrawing their basis].

[Alan S.]

Put another way, there are NO new clocks as a result of the Roth 401k rollover.

But if you had prior Roth IRA conversions, there is still a 5 year holding period to avoid the 10% penalty when you distribute those conversions. If you don't have any such conversions, then you need to know how much earnings there was in your Roth distribution. The Box 5 amount on your Roth 401k distribution is the amount that you add to your basis in regular Roth IRA contributions as the various balances in your Roth IRA are adjusted from designated Roth accounting to your Roth IRA accounting.

I know this is very confusing. If you want to post some numbers as an example, I can comment on your actual situation.

[DeathAndTaxes]

Thanks Alan -- I have not seen any basis reported for the rolled over funds on the documents I've received. I think that is the crux of my issue, so I will take another look at the documents and see if I'm missing something. Do you know if this amount would be reported in the year of the rollover (2011) or the year of the distribution (2012) ? Thanks !

[DeathAndTaxes]

Alan -- i see you answered my last question already (what year the basis is reported). I have to dig up that document from last year, I don't recall seeing it. Thank you.

[Alan S.]

Look for the 1099R that reported the rollover from the Roth 401k account, a 2011 1099R and your Roth 401k contributions should be in Box 5. That figure could be higher than the amount you received if you had losses on your deferrals, but that figure is still the amount you should add to your Roth IRA regular contributions amount. And if it is higher, it will supplant gains you have in your Roth IRA.

Example: Your Roth IRA has 10,000 in contributions and is worth 12,000 due to gains.
Then you roll over your Roth 401k. Box 5 is 7,000 but the rollover was only 5,000 due to losses.
The result is that you new total in your Roth IRA is 17,000 and from here you are considered to have made 17,000 in regular Roth IRA contributions and no longer have gains as they were offset by the
loss.

You would show the 17,000 as your regular Roth contributions in this example on Form 8606 reporting a Roth IRA distribution. If you have no gains and no conversions under 5 years, there is no need to even claim a first home exception as you would get no benefit from it. If you had a gain of 1,000, then claim a 1,000 first home exception if you qualify and the exception will erase any tax or penalty on the gain.