We have discussed situations where Roth IRA withdrawals are tax free, or not tax free when you are under 59 1/2 old and your account couldn't pass the 5-year test. What if you have passed the 5-year account test but your are under 59 1/2 old?
The Special Home Purchase Exception
If you’ve passed the five-year test but you’re under 59½, a special exception allows tax-free and penalty-free Roth withdrawals to the extent of money spent within 120 days to buy a principal residence. However, there’s a lifetime $10,000 limit on this deal. The home buyer can be you or certain relatives (including kids and grandkids). However, the buyer must not have owned a principal residence within the two-year period ending on the purchase date.
The last word
While the tax rules for nonqualified Roth withdrawals are complicated, everything falls in place when you complete Part III of Form 8606. One more thing: shortly after the end of any year you take withdrawals, you should receive a Form 1099-R from the Roth trustee or custodian. It shows the total amount of withdrawals for the preceding year, and the IRS gets a copy. So if you took any nonqualified withdrawals, the Feds will expect to see a Form 8606 included with your return.
The Special Home Purchase Exception
If you’ve passed the five-year test but you’re under 59½, a special exception allows tax-free and penalty-free Roth withdrawals to the extent of money spent within 120 days to buy a principal residence. However, there’s a lifetime $10,000 limit on this deal. The home buyer can be you or certain relatives (including kids and grandkids). However, the buyer must not have owned a principal residence within the two-year period ending on the purchase date.
The last word
While the tax rules for nonqualified Roth withdrawals are complicated, everything falls in place when you complete Part III of Form 8606. One more thing: shortly after the end of any year you take withdrawals, you should receive a Form 1099-R from the Roth trustee or custodian. It shows the total amount of withdrawals for the preceding year, and the IRS gets a copy. So if you took any nonqualified withdrawals, the Feds will expect to see a Form 8606 included with your return.
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