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New Member
posted Jun 6, 2019 7:06:00 AM

5 year rule for ROTH IRA qualified distribution: My 1st tax year 2014 (rolled 401K in July 2014)...5th tax year is 2018. Can I withdraw now to buy a home without penalty?

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6 Replies
New Member
Jun 6, 2019 7:06:01 AM

Edit: I have been contributing to my ROTH 401K since 2010 and continued to contribute to my ROTH IRA when I rolled it over in 2014. I would only like to use $10,000 to purchase a home this year (2018) but I do not want to be penalized or taxed if I request the money.

Level 15
Jun 6, 2019 7:06:04 AM

You will not have met the 5 year rule until 2019.  You can withdraw your original Roth contributions, if any, in 2018 without tax or penalty.  If used for a first-home purchase in 2018, the amount distributed that is attributable to the taxable portion of the conversion from the 401(k) will not be subject to tax but you'll need to apply the first-home purchase exception (on a maximum of $10,000 lifetime) to avoid the early distribution penalty on this portion.  Any distributed earnings will be taxable but will also not subject to an early-distribution penalty with the application of the first-home penalty exception since there is no need to meet the 5-year rule to avoid the penalty, only to make the earnings nontaxable.  To qualify for the penalty exception, any distributed earnings must be used for the acquisition of the first home within 120 days of the distribution.

Level 15
Jun 6, 2019 7:06:06 AM

I've added to my answer to address the fact that the Roth IRA contains conversion basis from the rollover from your traditional 401(k).  If the rollover was instead from a Roth 401(k), your contribution basis in the Roth 401(k) became contribution basis in your Roth IRA and there would be no conversion basis unless you also converted from the traditional 401(k).

New Member
Jun 6, 2019 7:06:09 AM

Two issues that still confuse me with your answer. If I do not meet the 5 year rule until 2019, why am I able to withdraw my original ROTH contributions without tax or penalty to buy a home?

Level 15
Jun 6, 2019 7:06:11 AM

Any amount originally contributed directly to a Roth IRA, or any amount originally contributed to a Roth 401(k) and subsequently rolled over to a Roth IRA, is contribution basis in your Roth IRA.  When making a distribution from a Roth IRA, contribution basis comes out first tax- and penalty-free regardless of when you receive the distribution or what you do with the money.  That's likely to be a substantial portion of your Roth IRA because you have been making Roth contributions since 2010.

Next out is your conversion basis, if any.  Amounts converted to Roth from a traditional IRA or rolled over to a Roth IRA from a traditional 401(k) become conversion basis in your Roth IRA.  Of your conversion basis, any amounts that were taxable at conversion or rollover come out first, tax-free but subject to penalty if you have not met the 5-year holding period for the conversion.  These are followed by any amounts that were converted tax free (from after-tax basis in the traditional IRA or in the 401(k)), tax and penalty free.  Finally, out comes any earnings earned either in the Roth IRA, or the Roth 401(k) prior to the rollover to the Roth IRA.

See Ordering Rules for Distributions in IRS Pub 590-B:
<a rel="nofollow" target="_blank" href="https://www.irs.gov/publications/p590b#en_US_2016_publink1000231071">https://www.irs.gov/publications/p590b#en_US_2016_publink1000231071</a>

For those portions from taxable conversions or earnings, if your home purchase qualifies is a first-home purchase, you can apply the first-home purchase exception to eliminate the penalty (but not the income tax unless you wait until 2019 to make the distribution).

Level 15
Jun 6, 2019 7:06:12 AM

The amount of your rollover from the Roth 401(k) to the Roth IRA that was contribution basis in your Roth 401(k) and became part of your contribution basis in your Roth IRA should have been shown in box 5 of the 2014 Form 1099-R that reported the distribution from the Roth 401(k).