Advanced Underwriting Consultants

Question of the Day – February 22

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question:  What is the special first time home-buyer rule with regard to Roth IRA distributions?

Answer:  Qualifying distributions from a Roth are income tax-free.

A qualifying distribution occurs when an individual takes a distribution following a five year period beginning with the taxable year in which that individual first made a contribution to any Roth IRA in the taxpayer’s own name and one of the following is met:

(1) the distribution is on or after the owner attains age 59-1/2,

(2) the distribution is made to a beneficiary after the death of the owner,

(3) the distribution is on account of the owner’s disability, or

(4) the distribution is a qualified first-time home-buyer distribution.

All other Roth IRA distributions are non-qualifying.  Non-qualifying Roth IRA withdrawals are made according to the following ordering sequence: (1) aggregate annual contributions, (2) conversion amounts, (3) earnings on annual contributions and conversion amounts.

Distributions of annual contributions are always income tax-free and are never subject to the 10% early withdrawal penalty.  A distribution of conversion amounts is also income tax-free, but these amounts may be subject to the 10% early withdrawal penalty if made within five years of the conversion and while the owner is under age 59-1/2.

Earnings distributed prior to age 59-1/2 are also generally subject to the 10% early withdrawal penalty.

The taxpayer can take a qualifying distribution from a Roth IRA if she meets the five year test AND she qualifies for the first time home-buyer test.

The home-buyer can be the taxpayer or a close member of the taxpayer’s family.  To qualify for the exception, the money must be used within 120 days after distribution from the IRA for home purchase expenses.

A taxpayer can only claim use the first time home-buyer rule to shelter up to $10,000 of Roth IRA distributions from income tax during the taxpayer’s lifetime.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.