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
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.
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:
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.
Yourself.
Your spouse.
Your or your spouse's child.
Your or your spouse's grandchild.
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.
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
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.
Thanks for your reply.
Yes, I entered information for the Roth conversion in 2020, and also the "contributions prior to 2021" screens. I was a little confused by these screens, but did the best I could with the documents that I have available.
Yes, I saw the "Good News" screen, but it still says I owe hundreds in taxes.
I have Premier--is there an upgrade to TurboTax available that would allow me to have an accountant at intuit look over my return and make sure that it is correct? I'm willing to pay for a higher version to make sure that my return is correct, because I believe that I should not owe anything on the withdrawal based on what I have read from the IRS.
Yours truly,
Kevin
Actually you do not need to upgrade to another version of TurboTax. Premiere will handle the transaction. You do need to request ExpertHelp which is an additional fee but you will get a LIVE person to work on the return with you. They will be able to see your return and guide you to completion. To access that service please follow the instructions below.
If you originally selected TurboTax Free Edition, Deluxe, Premier, or Self-Employed, you can add TurboTax Live.
You can do this at different points while working on your return, but to add it now:
You'll see your TurboTax Live price in this screen.
Don't worry about paying for TurboTax Live before you speak to a tax expert. You'll pay when you file your taxes.
If you have a question about your return and aren’t sure if it requires the help of a Tax Expert, enter your question in the Search box and we'll let you know if you need a tax expert.
Note: TurboTax Live is available for TurboTax Online customers only. TurboTax Live isn't available in the TurboTax CD/Download software.
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.
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