Roth IRA Early Withdraw Question - Rollover from Previous Employer

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Topic Author
pcarrollg
Posts: 2
Joined: Mon Apr 15, 2019 6:23 am

Roth IRA Early Withdraw Question - Rollover from Previous Employer

Post by pcarrollg » Mon Apr 15, 2019 6:50 am

Hi,

I am looking for some help with a Roth IRA account that I was planning on using for a first time home purchase. I thought I would qualify for the first time home purchase exemption, however after reviewing the rules for a qualified withdraw I am confused by all of this. I am also now concerned about an IRA rollover I completed last year and am looking for help to make sure that it occurred correctly.

My information is as follows:


In 2013 I started working for employer A. I contributed to both a regular 401k, and a Roth 401k with this employer, all through Fidelity.


In 2016 I opened a Roth IRA with Fidelity and started contributing to that.


In 2018 I switched employers. I rolled over the pre-tax 401k money in Fidelity into a Traditional IRA at Vanguard. I rolled over the Roth 401k, and the Roth IRA money I had at Fidelity to a Roth IRA at Vanguard. My new employer uses Fidelity for the retirement account.


The total in the Roth IRA at Fidelity that I switched to Vanguard was $2800.


I received two 1099R forms from Fidelity.

The first form has distribution code H. The gross distribution (Box 1) is $20,000. The Box 5 total is $14,000. This money was deposited into the Vanguard Roth IRA. The taxable amount on the 1099R says $0.00. Box 11 (1st year of design. Roth contrib.) states 2013.
The second 1099R has distribution code G. The Gross distribution is $84,000 in box 1. The Box 5 total is $2300. There is no year listed in Box 11 (it is blank) and the taxable amount shows $0.00.


Fidelity shows 3 payments that were made to Vanguard. $81,700 was sent to the Vanguard IRA, and is listed as IRS code G. $2,300 was sent to the Vanguard Roth IRA and listed as code G. $20,000 was sent to Vanguard Roth IRA and listed as code H.

I am trying to identify when the 5 year window for my Roth IRA started. The earliest 5498 form I can find on Fidelity's website is from 2016. Does that mean this is when the 5 year window started for my Roth IRA? I was looking to use the $10,000 gain withdraw limit as part of my down payment on a first time home purchase. I thought that since I started contributing to the Roth 401k in 2013 that I was OK to do this without a penalty, however is that not true?

If I can't withdraw the gains from the Roth IRA, can I still withdraw the contributions without penalty to use on a home purchase? Even the amount that was converted from the Roth 401k to a Roth IRA?

Thanks, any advice is very helpful

Alan S.
Posts: 8339
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Roth IRA Early Withdraw Question - Rollover from Previous Employer

Post by Alan S. » Mon Apr 15, 2019 10:55 am

pcarrollg wrote:
Mon Apr 15, 2019 6:50 am
Hi,

I am looking for some help with a Roth IRA account that I was planning on using for a first time home purchase. I thought I would qualify for the first time home purchase exemption, however after reviewing the rules for a qualified withdraw I am confused by all of this. I am also now concerned about an IRA rollover I completed last year and am looking for help to make sure that it occurred correctly.

My information is as follows:


In 2013 I started working for employer A. I contributed to both a regular 401k, and a Roth 401k with this employer, all through Fidelity.


In 2016 I opened a Roth IRA with Fidelity and started contributing to that.


In 2018 I switched employers. I rolled over the pre-tax 401k money in Fidelity into a Traditional IRA at Vanguard. I rolled over the Roth 401k, and the Roth IRA money I had at Fidelity to a Roth IRA at Vanguard. My new employer uses Fidelity for the retirement account.


The total in the Roth IRA at Fidelity that I switched to Vanguard was $2800.


I received two 1099R forms from Fidelity.

The first form has distribution code H. The gross distribution (Box 1) is $20,000. The Box 5 total is $14,000. This money was deposited into the Vanguard Roth IRA. The taxable amount on the 1099R says $0.00. Box 11 (1st year of design. Roth contrib.) states 2013.
The second 1099R has distribution code G. The Gross distribution is $84,000 in box 1. The Box 5 total is $2300. There is no year listed in Box 11 (it is blank) and the taxable amount shows $0.00.


Fidelity shows 3 payments that were made to Vanguard. $81,700 was sent to the Vanguard IRA, and is listed as IRS code G. $2,300 was sent to the Vanguard Roth IRA and listed as code G. $20,000 was sent to Vanguard Roth IRA and listed as code H.

I am trying to identify when the 5 year window for my Roth IRA started. The earliest 5498 form I can find on Fidelity's website is from 2016. Does that mean this is when the 5 year window started for my Roth IRA? I was looking to use the $10,000 gain withdraw limit as part of my down payment on a first time home purchase. I thought that since I started contributing to the Roth 401k in 2013 that I was OK to do this without a penalty, however is that not true?

Yes, the 5 year holding period starts in 2016 and is not completed until 1/1/21. Your Roth 401k holding period does not count because there is no first home penalty exception for a 401k plan. This is an IRA only exception.

If I can't withdraw the gains from the Roth IRA, can I still withdraw the contributions without penalty to use on a home purchase? Even the amount that was converted from the Roth 401k to a Roth IRA?

Yes, the Roth IRA ordering rules apply. Apparently you have not done any conversions or IRRs in your 401k plan, but you did do a qualified Roth rollover of 2300. Your Roth IRA basis for regular contributions is 14,000 (from the Roth 401k) plus whatever you contributed to the Roth IRA. You also have non taxable conversion basis of 2300 in your Roth IRA that is available tax free. The current value of your Roth IRA less this basis amount is your Roth IRA gains. If you distribute any gains, they are taxable, but not subject to penalty if you qualify for the first home penalty exception up to 10k. If you withdraw from your TIRA, you would owe ordinary taxes, but no penalty. However, 10,000 is the combined total per taxpayer for life for which the 10% penalty can be waived for a first home buyer. A spouse would have their own 10,000 penalty limit. Once you get to the point where you need to report Roth IRA distributions on Form 8606, post back here.

I suggest that you take any IRA distributions as late as possible so you will know how much you need. The one rollover limit for all IRAs means that you can only roll one distribution back if you don't need the money. However, should a first home purchase fall through you have 120 days to roll the money back and in this case there is no one rollover limitation.

Finally, although you don't qualify for the tax free distribution of Roth gains up to 10k until 2021, this would have been just been advance treatment as qualified. The following year, your Roth basis gets reduced by 10k and your gains are restored to your Roth, so if you need another Roth distribution before the account is fully qualified, you would owe tax on those gains.

Thanks, any advice is very helpful

Topic Author
pcarrollg
Posts: 2
Joined: Mon Apr 15, 2019 6:23 am

Re: Roth IRA Early Withdraw Question - Rollover from Previous Employer

Post by pcarrollg » Mon Apr 15, 2019 2:52 pm

Hi Alan,

Thanks for all of the help. So if my total Vanguard Roth IRA is $32,000 right now and I wanted to use all of it, I can take out the following without tax or penalty:

$2800 - Original Roth IRA Contributions
$2300 - Qualified Roth rollover
$14,000 - Basis from the Roth 401k rollover

Then for the remaining $12,900, $10,000 of it could be taken out with ordinary tax, and the remaining $2,900 would be subject to ordinary tax and a 10% penalty. What would the ordinary tax rate on this $12,900 be? If I withdraw it in 2019 is it added to my income? So if I'm already in the 24% marginal tax bracket, and this withdraw wouldn't put me into the next bracket, is it all taxed at 24%?

Can you give some more information on your last two paragraphs? What is the IRA rollover limit referring to? What do you mean by rolling one distribution back if I don't need the money. Is that rolling it back from a Roth IRA to a tIRA? Also, why does the Roth basis get reduced by 10k in 2022?

Thanks again for the advice!

Alan S.
Posts: 8339
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Roth IRA Early Withdraw Question - Rollover from Previous Employer

Post by Alan S. » Mon Apr 15, 2019 7:40 pm

pcarrollg wrote:
Mon Apr 15, 2019 2:52 pm
Hi Alan,

Thanks for all of the help. So if my total Vanguard Roth IRA is $32,000 right now and I wanted to use all of it, I can take out the following without tax or penalty:

$2800 - Original Roth IRA Contributions
$2300 - Qualified Roth rollover
$14,000 - Basis from the Roth 401k rollover

Second two figures are correct. Not sure about the 2800, since 2800 was the value of the Roth IRA, not necessarily the amount of your regular Roth contributions. It's unlikely that the value of the account stayed identical to the amount you contributed.

Then for the remaining $12,900, $10,000 of it could be taken out with ordinary tax, and the remaining $2,900 would be subject to ordinary tax and a 10% penalty. What would the ordinary tax rate on this $12,900 be? If I withdraw it in 2019 is it added to my income? So if I'm already in the 24% marginal tax bracket, and this withdraw wouldn't put me into the next bracket, is it all taxed at 24%?

Yes, the 12,900 (or amount in excess of your Roth IRA basis) would have to be reported as income on lines 4a and 4b of Form 1040 after completing Form 8606. 10% penalty on 2900. It would be taxed at 24% unless some or all of it landed in a different bracket due to your other taxable income. Perhaps it would be better not to completely drain your Roth IRA though.

Can you give some more information on your last two paragraphs? What is the IRA rollover limit referring to? What do you mean by rolling one distribution back if I don't need the money. Is that rolling it back from a Roth IRA to a tIRA? Also, why does the Roth basis get reduced by 10k in 2022?

The one rollover limit states that you can only roll over one IRA distribution over a 12 month period for all your IRAs combined. As such it is perhaps better to take a larger distribution than necessary and roll back the amount you don't need within 60 days. That's if you have not done another rollover in the last 12 months. If you took more than one distribution, you could only roll one of them back. But there is an exemption if the first home purchase falls through or is delayed. If that happens you have 120 days to roll the funds back and these rollovers do not count against the one rollover rule.

The rollover I am referring to is rolling any distribution from the Roth you do not need back to your Roth IRA. The same rule would apply if you took your distribution (taxable) from your TIRA, didn't need all of it and rolled the portion you did not need back to your TIRA. As you can see these rules are complicated and require careful planning before you take a distribution from any IRA.

Why does the Roth basis get reduced in the following year? This is only if you take the distribution after holding your Roth for 5 years as a qualified first home distribution. Otherwise it does not apply. For the qualified distribution, the IRS intended it to be a non taxable advance of your Roth gains, not a permanent chance to get the gains out tax free. So if you take a later distribution, your basis will be less unless you wait until 59.5 when your Roth is qualified and this does not matter.


Thanks again for the advice!

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