Early Withdrawal from Roth IRA Older than 5 Years Including First-Time Home Exemption

[rssr1991]

I took an early withdrawal from my Roth IRA (which I have owned for more than 5 years) for a first time home purchase. I took 40K out and am aware that the exclusion to not pay a penalty and taxes is only on my contributions and the10K first time home buyer exemption. My contributions into the Roth were about 17K. For some reason form 1040 line 4b "taxable amount" is on $23k ($40k distribution minus the $17k in contributions). It doesn't take into account the $10k first time home buyer exemption. It is my understanding that in an early distribution from a Roth IRA which is over 5 years old, no penalty or taxes apply to the contributions and no penalty or taxes apply to the $10K home exemption. This leaves me to be taxed and penalized only on the $13k remainder in earnings. Form 5329 does have the $13k amount listed for the 10% penalty, but why am I being taxed on the $23k amount instead of the 13k amount? I indicated that I have owned the IRA for more than 5 years when prompted.

[rssr1991]

I would also like to add that on form 8606, line 20 does not populate with the 10K first time home buyer number. This may have something to do with the taxable income not being reduced by the 10K and then flowing to the 1040. I'm not sure where I can enter this information. Form 1099R has a code of T for my situation, and now I'm wondering if the 1099-R is incorrect and has a code that does not register the first time home exemption?

[DanaB27]

I cannot recreate the issue, you might have to delete the 1099-R and reenter it. Answer all follow up questions carefully.

A code T in box 7 of 1099-R is for a Roth IRA distribution, when an exception applies.  It is used for a distribution from a Roth IRA if the IRA custodian does not know if the 5-year holding period has been met but:

• The participant has reached age 59 & 1/2
• The participant died, or
• The participant is disabled.

If this is not correct, then you might have to contact the issuer to correct this.

If you need additional help please see What is the TurboTax phone number?

[rssr1991]

Thank you for your help. I'm pretty certain the code of T does not apply as I took an early distribution for the first time home purchase (and am not 59 1/2 yet). I will be reaching out to the issuer to try and request a corrected 1099-R.

[rssr1991]

I'm having trouble with the $10,000 first time home purchase exception not showing up on form 8606, line 20. Where does this line item flow from? If it is not on line 20, then I get taxed on the 10,000 (even though it should be tax free).

Thank you.

[rssr1991]

I just want to add that the broker did not reissue me a new 1099-R leading me to create a substitute one. In addition, I've been on the phone with the IRS discussing the various codes that this withdrawal for the first time home purchase would need to be on the 1099-R and the best advice I've gotten is to do code "J," but regardless, the correct amounts should show up on form 8606. If that 10,000 exception does not flow through I will need to do a return by hand. 

[ScottDIY]

I'm having this same issue - I should not be paying tax on the $10k but turbotax is acting like I should. What ended up happening for you?

[FangxiaL]

If you've held your Roth IRA for at least five years and you're older than age 59 1/2, the money you withdraw will be tax-free. If you open a Roth IRA account after you turn 59 1/2, you still have to wait at least five years before you can take distributions of your earnings without an early withdrawal penalty.

In your case,  you still have to pay tax on the $10,000 home purchase exclusion (it is exempt from the 10% early withdrawal penalty only).

Roth IRA Withdrawal Rules

@ScottDIY

[Edited on 1/28/2022|12:42 PM,PST]

[rssr1991]

Sorry this is happening to you. After hours of trying to get turbotax to work, I went ahead and filed a paper return. I used many of the forms that were filled in from turbotax which helped a lot. I printed those out, but also printed out the remaining forms which related to this specific withdrawal, calculated the amounts and filled in the required numbers myself. In my case, I had to file a substitute form 1099-R to account for my broker's error in classification of type of withdrawal. I filled out form 5329 and form 4852 (the latter explains how you arrived at your numbers and what effort you made in trying to get a corrected 1099-R from your broker). Also form 8606 needs to check out. I made sure those numbers traced back to the main 1040 as all numbers in your return should obviously cross-reference.  Don't hesitate to contact the IRS if you have any particular questions before you submit your return. For example, when I contacted them, they let me know that I was eligible for an additional $5k not to incur the 10% penalty because we had a baby that year and there was an Act passed called the Secure Act of 2019 that allowed for this. It's not the ideal answer you were probably hoping for with a simple click somewhere in Turbotax, but I hope this helps.

[rssr1991]

I disagree about having to pay taxes on this amount. 

If the IRA is a Roth, withdrawals of up to $10,000 used to purchase a “first home” are completely free of tax and penalty (as long as the funds have been in the IRA for five years or more).  In my case, the funds were there for more than 5 years and were used for a first time home purchase. No taxes should be paid on the $10K amount.

[ScottDIY]

Perhaps you misunderstood my situation. There is a bug with the Turbotax software.

I meet all qualifications for the $10k tax-free first time homebuyer purchase. TurboTax even asks me for that information and I fill it out correctly. But the data is not saving correctly, and Form 8606 Line 20 is not putting the $10,000 there. This is resulting in my taxes being calculated incorrectly.

This should be escalated to TurboTax's engineers, but I have no idea how to get in touch with them.

[rssr1991]

I think I did understand correctly. What you are describing happened to me as well. Turbotax was unable to help me on here and I had no luck getting in touch with them, so I took matters into my own hands and filled out form 8606 on my own in addition to other forms I mentioned in my previous reply to incorporate the $10k I should not be paying taxes on and made sure that number and all related calculations was then reflected on a 1040 which I also filled out on my own. I was able to use the other forms like schedule C, which don't calculate anything related to the IRA distribution straight out of Turbotax. Then combined the forms that Turbotax got right and the forms that I did on my own due to the glitch with the IRA distribution. I'm sorry, I know it's frustrating and I hope they get it right soon.

[rssr1991]

Also, to be clear, after I combined my forms with those from Turbotax, I had to send in the return by mail 😕

[ScottDIY]

You understood me, but the "Turbotax Expert" that replied did not 🙂 Sorry to hear you went through so much effort to file... I might just go to an accountant if they don't fix the bug soon.

[rssr1991]

Got it. Yes, calling Turbotax about this got me talking to a regular customer representative. I didn't have the energy to escalate it and try to go up the ranks because I was already dealing with trying to get this return done accurately and had a tax deadline.