Level 2

Solved

Tax on a Roth IRA Withdrawal for First Time Home Purchase?

Forum|Forum|4 years ago
February 2, 2022
2 replies
51 views

Hello,

In 2021 I withdrew about $9,400 from a Roth IRA to make a down payment on my first home. My understanding was that this amount would not be taxed. However, in working through TurboTax, I see that I am now owing taxes of about $550 because of this. The software said that it reduced my taxes on this because all of the money was used for my home purchase, but there are still taxes owed.

I was also confused by some questions that the program asked, like my total pre-2021 Roth IRA contributions. I answered this question as best as I could, but I did not have records going all the way back to when I opened the Roth IRA account.

The software also says some of the IRA distribution was taxable, and some was not.

I am willing to pay tax on this withdrawal, if necessary, but I was under the impression that I could simply withdraw the money as if it were from a savings account because of the first time home purchase.

Thank you,

Kevin

Best answer by dmertz

First, if the $9,400 came entirely from your basis in Roth IRA contributions, there is no need to apply the first-time homebuyer's exception to tax and penalty. Make sure that you click the Continue button on the page listing your Forms 1099-R and, when asked, update your basis in Roth IRA contributions as accurately as possible. You'll want to review your Roth IRA statements and Forms 5498 reporting your Roth IRA contributions.

If you've already distributed your basis in Roth IRA contributions and the $9,400 came from investment gains within the Roth IRA, the $9,400 applied to the purchase of a first home is a nontaxable distribution in 2021 only if you opened your first Roth IRA before 2017. Even so, TurboTax has a bug, introduced in the first release of 2020 TurboTax, that prevents it from accepting your entry of the amount of the distribution that was used for a first-home purchase. You can separately enter the amount as an exception to the 10% early-distribution penalty, but to make the distribution nontaxable you'll need you use the CD/download version of TurboTax in forms mode, override Form 8606 line 20 and enter the appropriate amount there; TurboTax presently has no other way to properly populate line 20. Doing an override will prevent you from e-filing.

E

ErnieS0

Level 15

The IRS allows you to withdraw money from a Roth IRA to buy a first-time home without paying tax and the early withdrawal penalty.

Check these items:

Is the code in Box 7 of your 1099-R "J"?
Did you see the screen Did you use the money you withdrew to buy our first home?
Did you enter $9,400?
Did you have a Roth IRA before 2017?

Even if you are under age 59½, you don't have to pay the 10% additional tax on up to $10,000 of distributions you receive to buy, build, or rebuild a first home. To qualify for treatment as a first-time homebuyer distribution, the distribution must meet all the following requirements.

It must be used to pay qualified acquisition costs before the close of the 120th day after the day you received it.
It must be used to pay qualified acquisition costs for the main home of a first-time homebuyer (defined below) who is any of the following.
1. Yourself.
2. Your spouse.
3. Your or your spouse's child.
4. Your or your spouse's grandchild.
5. Your or your spouse's parent or other ancestor.
When added to all your prior qualified first-time homebuyer distributions, if any, total qualifying distributions can't be more than $10,000.

**Say "Thanks" by clicking the thumb icon in a post. **Mark the post that answers your question by clicking on "Mark as Best Answer"

K

KevinAPrattAuthor

Level 2

Thank you very much.

Box 7 does have "J," and I meet all of the requirements for the first time home buyer.

However, TurboTax is still showing that I owe taxes of several hundred dollars on the withdrawal.

It seems like the issue may be that in 2020, I converted a traditional IRA into a Roth IRA (from which I withdrew in 2021). But I converted it properly and paid that taxes on it in 2020.

And I even checked the IRS website, went through an "interview" on their site, and got this answer:

"The Roth IRA distribution is not taxable. Amounts that are properly rolled over or transferred are not subject to tax. The remaining distribution is not taxable because it is a qualified distribution."

But I cannot figure out how to get the taxes to be dropped off in the TurboTax program. I have indicated in TurboTax that it was for a first time home purchase, of course.

Do you have any ideas?

Thank you very much,

Kevin

DaveF1006

Level 15

It depends. Did you work all the way through the sections including the Roth conversion screen and then reached a screen that said Let's See if We Can Reduce Your Early Withdrawal Penalty?

The next screen you will enter $9400 under First Time Home Purchase. The next screen after that should say Good News: Your Tax Bill just got lower. you don't owe Extra Tax on the money you took out of your IRA. If it says something else, let us know.

**Say "Thanks" by clicking the thumb icon in a post. **Mark the post that answers your question by clicking on "Mark as Best Answer"

D

dmertzAnswer

Level 15

First, if the $9,400 came entirely from your basis in Roth IRA contributions, there is no need to apply the first-time homebuyer's exception to tax and penalty. Make sure that you click the Continue button on the page listing your Forms 1099-R and, when asked, update your basis in Roth IRA contributions as accurately as possible. You'll want to review your Roth IRA statements and Forms 5498 reporting your Roth IRA contributions.

If you've already distributed your basis in Roth IRA contributions and the $9,400 came from investment gains within the Roth IRA, the $9,400 applied to the purchase of a first home is a nontaxable distribution in 2021 only if you opened your first Roth IRA before 2017. Even so, TurboTax has a bug, introduced in the first release of 2020 TurboTax, that prevents it from accepting your entry of the amount of the distribution that was used for a first-home purchase. You can separately enter the amount as an exception to the 10% early-distribution penalty, but to make the distribution nontaxable you'll need you use the CD/download version of TurboTax in forms mode, override Form 8606 line 20 and enter the appropriate amount there; TurboTax presently has no other way to properly populate line 20. Doing an override will prevent you from e-filing.

K

KevinAPrattAuthor

Level 2

Thank you very much!!! I followed your instructions to override Form 8606, and the taxes for the IRA withdrawal went away!

I noticed that you said I cannot e-file, having overridden the forms. So does that mean that I have to print out forms and mail them to the IRS? I'm willing to do so, but have never done that before.

Yours truly,

Kevin

D

dmertz

Level 15

Yes, you'll have to print and mail.

As I mentioned previously, be sure to override line 20 of the 2021 Form 8606 only if you had a Roth IRA before 2017. If your first Roth IRA was established in 2017 or later, an entry on line 20 is not permitted for 2021.