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I agree the contributions have to be removed first. But, I believe you still should be able to make a "qualified distribution" for first-time home up to $10000 of the earnings after withdrawing all contributions. The pub makes a clear distinction between withdrawal of contributions and qualified distributions. The $10000 exclusion applies to "qualified distributions" not withdrawal of contributions. The "ordering rules" would not be violated or even apply since no "nonqualified distributions" would be made.

I think you're misinterpreting the first sentence in the discussion of ordering rules that begins on page 43 of Pub 590. When it says that if there are nonqualified distributions you might have taxable income, it does not mean that the ordering rules apply only to nonqualified distributions. As it clearly states later in that paragraph, the ordering rules apply to all distributions except the return of excess contributions and the earnings on them. Are we agreed on that? If so, then we're in agreement that if there have been $14,000 in contributions, as was the original poster's plan, the first $14,000 withdrawn from the Roth will be contributions. Are we in agreement with that?

Now let's go back to page 42 and look at qualified distributions. Assuming the Roth IRA has been funded at least 5 years, if one is under 59 1/2 one can withdraw up to $10,000 lifetime as a qualified distribution for a first-time home purchase. So, we see that the first $10,000 withdrawn for this purpose will be considered a qualified distribution.

Now going back to the ordering rules on page 43 and the worksheet that begins there, we see that the $10,000 qualified distribution is all contributions. The next $4,000 withdrawn will be a nonqualified distribution, but there won't be any taxable income since these are contributions.

At this point we begin withdrawing earnings. Since we long ago used up our $10,000 lifetime "qualifying" the earnings are nonqualified and, thus, taxable income. However, though they're taxable, the premature distribution penalty won't apply because of the penalty exception that applies to the first $10,000 of taxable distributions used to fund a first-time home purchase.

Let's say we withdraw a total of $24,000 from this Roth that has been funded for 5 years and we use the entire proceeds to fund purchase of a home. Verbally, we have a qualified distribution of $10,000 and a nonqualified distribution of $14,000. Of the nonqualified distribution, only $10,000 is taxable, and that isn't subject to penalty because of the penalty exception.

If you take these numbers and do the worksheet you'll see that you come out with $10,000 taxable income. If you don't get that, please post the worksheet line numbers and amounts you entered.

Phil Marti
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