The Scenario: One funds his Roth IRA for 7 years at $2000/yr for a total of $14000. The earnings come to $10000 for a total account of $24000... No conversions, excess contributions, etc... He wants to obtain first-time homeowner funds from his IRA and qualifies under provisions in Pub 590. One withdraws $14000 in contributions first. No qualified distribution is involved or required, since this is simply a return of contributions and not a taxable event. "You do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s)."NOTE: There is a very clear distinction here between "qualified distributions" and "distributions" which are a return of regular contributions.Next one withdraws $10000 for first-home purchase as a "qualified distribution" from the earnings remaining in the Roth account.One does not use the worksheet since it is designed for "NOT qualified distributions": "How Do I Figure the Taxable Part?To figure the taxable part of a withdrawal (distribution) that is NOT a qualified distribution, complete the following worksheet."There is even an interesting caution not to use the worksheet if a conversion is involved, since it will return inappropriate results. If one uses the work sheet to figure tax on "qualified distributions" similar erroneous results WILL be obtained. With regards to ordering, contributions were removed first and then earnings as required. The purpose for ordering is to determine how funds are to be classified when removed and the taxable part of a withdrawal that is NOT a qualified distribution. The bottom-line is in italics and bold above. I believe my interpretation is consistent and reasonable with what is actually written in Pub 590. Perhaps there is something in the actual tax code which I am missing.
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