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ebarwick
Returning Member

Inherited Roth IRA used to purchase "first-time home"

My husband passed away (1/2015) and we owned our home together since 5/2006.  In 2016 I decided to purchase a new home.  To help pay for the purchase I used a ROTH IRA that I inherited from my husband. I was told by a friend that as long as I reinvested the original contribution ($8000) into a new ROTH IRA, I can keep the interest and it won't be taxable.  I'm beginning to see that it is A LOT more complicated than that: 

First, do I qualify as first time home buyer? I owned a Co-op apartment until 2004 but my husband and I owned our homes together until his death.  So can I claim this as a first time home buyer? If not, what can I do?

Second, how do I deal with the ROTH IRA that I inherited and used to buy the house?  I reinvested the original $8000 into a new ROTH IRA but I used everything else for the house.  I was told that my tax liability would be limited if I reinvested the original contributions.  Was I told wrong?



2 Replies

Inherited Roth IRA used to purchase "first-time home"

First, an inherited Roth IRA from a spouse is not subject the the early distribution penalty so what you do with the distribution  makes no difference.   (You would not qualify for first home buyer anyway).

Second, If box 7 on the 1099-R is a "Q" then it is not subject to any tax at all.   If box 7 is a"T" then if the Roth has not be in existence for 5 years then earnings might be taxable, but if 5 years or more, it would the the same as code "Q" and not taxable.
**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
dmertz
Level 15

Inherited Roth IRA used to purchase "first-time home"

It's uncommon for a surviving spouse not to move the inherited Roth IRA into a Roth IRA owned by the surviving spouse, rather than maintain the IRA as an inherited Roth IRA.  Many (perhaps most) Roth IRA agreements make it mandatory for the surviving-spouse beneficiary to treat the inherited Roth IRA as the surviving spouse's own.  Therefore, it's entirely possible that the code for this distribution is J because it's actually a distribution from the surviving spouse's own IRA.

As macuser_22 said, because you had an ownership interest in a principal residence at least as recently as 1/2015, you would not qualify as a first-time homebuyer with respect to any distribution you made in 2016.

Along with the Roth IRA, your husband's basis in Roth IRA contributions and conversions moved with the IRA.

So you first need to determine if the Roth IRA is indeed an inherited Roth IRA (titled as something like: Husband, deceased, FBO Surviving Spouse, beneficiary) or is an owned Roth IRA, titled in only your name.  You'll may then need to determine the amount of contribution and conversion basis your husband had in Roth IRAs.
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