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Author: nruder Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121323  
Subject: Using an IRA to save for a Home Date: 8/26/2000 12:03 PM
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I am just beginning to invest/save for the future. I have assesed some of my family's future financial goals and the next big investment would be for a home in the next 7 years.

I have considered starting small by using a direct investment plan beginning with Intel. I feel comfortable and confident with this decision, but have not made up my mind if this investment/savings should be in an IRA with the specific purpose of being allocated to the pruchase of a house.

There are several advantages with putting into an IRA. One, this would defer any taxes until it is withdrawn. Two, if we decided to not use the money in the IRA, it could just stay there as part of our retirement.

I have read about the disadvantages of withdrawing money from an IRA for a home, but this was from an already existing IRA. This situation is a little different because we would start out with the money in the IRA specifically for a home.

Let me know your thoughts. Is an IRA a good place to put money aside for the purchase a home in the next 7 years or not?

Thanks for your help!!!!
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Author: TMFExRO Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39151 of 121323
Subject: Re: Using an IRA to save for a Home Date: 8/26/2000 1:32 PM
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Let me know your thoughts. Is an IRA a good place to put money aside for the purchase a home in the next 7 years or not?

I think it's a bad idea, from a tax perspective, as opposed to your proposed alternative: investing in stock which you plan to hold until you buy the house. Let's say you follow the same investment strategy in both an IRA and a taxable account. Here's what happens:

IRA: You pay no tax on your gains until you withdraw the money for the house. At that time you can withdraw $10,000 without penalty, but you pay income tax at your marginal rate on every penny withdrawn, plus a 10% penalty on anything over $10,000.

Taxable account: If your stock pays dividends you pay income tax as they are paid, even if you re-invest. However you pay no tax on the appreciation in value until you sell. When you sell, you'll be taxed only on the gain, and then at a reduced rate.

TMF ExRO
Phil Marti



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Author: Fool4now2 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39157 of 121323
Subject: Re: Using an IRA to save for a Home Date: 8/26/2000 9:58 PM
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Let me know your thoughts. Is an IRA a good place to put money aside for the purchase a home in the next 7 years or not?

I think it's a bad idea, from a tax perspective, as opposed to your proposed alternative: investing in stock which you plan to hold until you buy the house. Let's say you follow the same investment strategy in both an IRA and a taxable account. Here's what happens:

IRA: You pay no tax on your gains until you withdraw the money for the house. At that time you can withdraw $10,000 without penalty, but you pay income tax at your marginal rate on every penny withdrawn, plus a 10% penalty on anything over $10,000.

Taxable account: If your stock pays dividends you pay income tax as they are paid, even if you re-invest. However you pay no tax on the appreciation in value until you sell. When you sell, you'll be taxed only on the gain, and then at a reduced rate.

TMF ExRO
Phil Marti


Phil
Why couldn't he just put $2000 a year in a Roth and at the end of 7 years take out the $14000 of contributions? If he leaves the interest/gains in the Roth account, there are no taxes due at all. Gives him some retirement savings and some money for closing costs, etc.
<<<OR>>>
Couldn't he also take out $10000 of the interest/gains for first home purchase and pay tax at marginal rate without penalty? That would give him after taxes about $22500 (or $21200 in 28% bracket) for downpayment and closing costs.
<<In addition>>
If he's married or has a SO, Roth's for them both would allow putting away $28000 over 7 years.



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Author: TMFExRO Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39158 of 121323
Subject: Re: Using an IRA to save for a Home Date: 8/27/2000 6:05 AM
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Why couldn't he just put $2000 a year in a Roth and at the end of 7 years take out the $14000 of contributions? If he leaves the interest/gains in the Roth account, there are no taxes due at all. Gives him some retirement savings and some money for closing costs, etc.

Because the original post mentioned not paying tax until the money was used, I assumed a deductible traditional IRA, not a Roth. Since Roth contributions are not deductible, this approach would have the same current income tax effect as buying long-term investments in a taxable account (absent dividends).

<<<OR>>>
Couldn't he also take out $10000 of the interest/gains for first home purchase and pay tax at marginal rate without penalty? That would give him after taxes about $22500 (or $21200 in 28% bracket) for downpayment and closing costs.


Yes. However, if this $10,000 was long-term capital gains it would be taxed at 20%, not 28%. (Since we're talking about a 7-year saving plan, actually some would be taxed at only 18% under the new rates going into effect next year.)

To sum up, strictly from a tax standpoint, I think he's better off in a taxable account if the chosen investment is long-term buy and hold stocks that don't pay a lot of dividends. With either approach "contributions" can be used without paying additional tax. With the taxable account, gains will be taxed at a lower rate than they would be coming from a Roth IRA.

All that said, let me throw in a clinker. I've often read that one should not put money needed within 5 years in the stock market. Perhaps the original poster should consider a mixed approach: begin investing in a taxable account for long-term buy and hold, and later make contributions to a Roth IRA, investing those contributions in safer investments that yield ordinary income.

I'd also suggest a visit to the Buying a Home board, where there might be some tips.

TMF ExRO
Phil Marti

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Author: nruder Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39195 of 121323
Subject: Re: Using an IRA to save for a Home Date: 8/28/2000 2:35 PM
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Thanks for your reply. I really appreciate the discussion regarding my situation.

I like the taxable account suggestion and feel that this is best for the situation.

I also like the mixed approach suggestion which would use more conservative investments as I approach the 5 year mark to purchasing a home. Why would these conservative investments be beter in a Roth IRA? Are the taxable gains taxed at a different rate? Or were you suggesting the favorable tax position of bonds for the Roth IRA, which are only taxed by the Federal Government?

Again thanks for your help.

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Author: TMFExRO Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39197 of 121323
Subject: Re: Using an IRA to save for a Home Date: 8/28/2000 3:38 PM
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Why would these conservative investments be beter in a Roth IRA?

Because they yield current income in the form of interest. If you hold these investments in your Roth IRA, you won't have to pay income tax unless and until you withdraw them for the home purchase. In a taxable account, you'd have to pay tax each year on the earnings.

The other plus is, as the other poster noted, if you don't need all the earnings, you'll have some retirement money left in your Roth which will never be taxed if you leave it there until you're 59 1/2.

TMF ExRO
Phil Marti

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Author: Fool4now2 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39320 of 121323
Subject: Re: Using an IRA to save for a Home Date: 8/30/2000 6:56 PM
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Couldn't he also take out $10000 of the interest/gains for first home purchase and pay tax at marginal rate without penalty? That would give him after taxes about $22500 (or $21200 in 28% bracket) for downpayment and closing costs.

Yes. However, if this $10,000 was long-term capital gains it would be taxed at 20%, not 28%. (Since we're talking about a 7-year saving plan, actually some would
be taxed at only 18% under the new rates going into effect next year.)

To sum up, strictly from a tax standpoint, I think he's better off in a taxable account if the chosen investment is long-term buy and hold stocks that don't pay a lot of dividends. With either approach "contributions" can be used without paying additional tax. With the taxable account, gains will be taxed at a lower rate than they would be coming from a Roth IRA.


Upon rereading the rules for withdrawals from the Roth IRA in Pub 590 page 42, since expenses for 1st time home purchase are qualified distributions (up to $10000 lifetime limit) NO TAX (nada--zilch) would be due. To re-sum up, strictly from a tax standpoint, the Roth would be better.

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39365 of 121323
Subject: Re: Using an IRA to save for a Home Date: 8/31/2000 7:04 PM
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<<Upon rereading the rules for withdrawals from the Roth IRA in Pub 590 page 42, since expenses for 1st time home purchase are qualified distributions (up to $10000 lifetime limit) NO TAX (nada--zilch) would be due. To re-sum up, strictly from a tax standpoint, the Roth would be better. >>

Not exactly correct. A distribution from a Roth IRA (up to $10k lifetime...as you note) is NOT a "qualified distribution" in the true sense of the word.

The distribution, if use for qualified first time homebuyer purposes, would certainly be exempt from the 10% early distribution penalty. But the income tax issues would be dependent upon how the funds got into the Roth IRA.

In the example above, it appears that the entire amount would flow to the Roth IRA from contributions. No conversions. That being the case, those contributions must be removed first...before any earnings (based upon the distribution ordering rules), and will not be subject to tax or penalty by definition.

BUT...say that there was only 4 years of contributions into the Roth IRA...$8,000. And that money earned an additional $2k in income...for an value of the Roth IRA of $10,000. If this $10k were removed for a qualified first time home purchase, there would be no tax or penalties on the $8k return of contributions, and there would be no penalty on the $2k of earnings, but there would certainly be tax on the $2k, since the taxpayer isn't over age 59 1/2 nor have the funds been kept in the Roth IRA for the required 5 taxable years.

Don't confuse a penalty beater provision with a qualified distribution from a Roth IRA. They are completely separate and apart.

TMF Taxes
Roy

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Author: Fool4now2 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39372 of 121323
Subject: Re: Using an IRA to save for a Home Date: 8/31/2000 8:00 PM
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BUT...say that there was only 4 years of contributions into the Roth IRA...$8,000. And that money earned an additional $2k in income...for an value of the Roth IRA of $10,000. If this $10k were removed for a qualified first time home purchase, there would be no tax or penalties on the $8k return of contributions, and there would be no penalty on the $2k of earnings, but there would certainly be tax on the $2k, since the taxpayer isn't over age 59 1/2 nor have the funds been kept in the Roth IRA for the required 5 taxable years.
Don't confuse a penalty beater provision with a qualified distribution from a Roth IRA. They are completely separate and apart.


With all due respect fellow fool, I believe you are incorrect. The following quotes from Pub 590 indicate otherwise:

"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)..."

"What Are Qualified Distributions?
A qualified distribution is, generally, any payment or distribution from your Roth IRA made after the 5-taxable-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit if the payment or distribution is:
1) Made on or after the date you reach age 59 1 /2 ,
2) Made because you are disabled,
3) Made to a beneficiary or to your estate after your death, or
4) One that meets the requirements listed under First home in chapter 1 (up to a $10,000 lifetime limit)."


Contributions can be removed tax free. Anytime after the five year period, the earnings (up to the $10000 limit) can then be taken for 1st home purchase without being included in gross income or taxed.

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Author: TMFExRO Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39416 of 121323
Subject: Re: Using an IRA to save for a Home Date: 9/1/2000 11:18 AM
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"What Are Qualified Distributions?
A qualified distribution is, generally, any payment or distribution from your Roth IRA made after the 5-taxable-year
period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit
if the payment or distribution is:
1) Made on or after the date you reach age 59 1 /2 ,
2) Made because you are disabled,
3) Made to a beneficiary or to your estate after your death, or
4) One that meets the requirements listed under First home in chapter 1 (up to a $10,000 lifetime limit)."


Contributions can be removed tax free. Anytime after the five year period, the earnings (up to the
$10000 limit) can then be taken for 1st home purchase without being included in gross income or taxed.


This one is tricky, and it took me quite a while to disabuse myself of what you're saying. The problem comes in not because of the definition of a qualified distribution, but because of the ordering rules. What happens here, in effect, is that the $10,000 "qualification" for first-time homebuyers is used up by return of contributions, thus leaving the earnings withdrawal as a nonqualified distribution subject to tax. Because the penalty rules apply only to taxable distributions, up to $10,000 of earnings can be withdrawn without penalty, but in this particular case the earnings would be taxable. As Roy noted, not all nonqualified, a/k/a taxable, distributions are subject to penalty, and not all penalty-free distributions are qualified.

It was clearest to me when I worked through the worksheet for computing the taxable portion of a Roth distribution. See Form 8606, Part III, and its instructions.

TMF ExRO
Phil Marti

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Author: Fool4now2 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39427 of 121323
Subject: Re: Using an IRA to save for a Home Date: 9/1/2000 3:32 PM
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This one is tricky, and it took me quite a while to disabuse myself of what you're saying. The problem comes in not because of the definition of a qualified distribution, but because of the ordering rules. What happens here, in effect, is that the $10,000 "qualification" for first-time homebuyers is used up by return of contributions, thus leaving the earnings withdrawal as a nonqualified distribution subject to tax.

Now I'm really confused. Why in the world would you want to "use up" the $10000 qualification for first-time homebuyers by removing contributions? They can be removed without being taxed anyways. I repeat the quote from Pub 590 "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)..." If qualified distributions and contribution withdrawals are not included in gross income, how would they be taxed?

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39430 of 121323
Subject: Re: Using an IRA to save for a Home Date: 9/1/2000 7:04 PM
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TMF Taxes originally said:

<<BUT...say that there was only 4 years of contributions into the Roth IRA...$8,000. And that money earned an additional $2k in income...for an value of the Roth IRA of $10,000. If this $10k were removed for a qualified first time home purchase, there would be no tax or penalties on the $8k return of contributions, and there would be no penalty on the $2k of earnings, but there would certainly be tax on the $2k, since the taxpayer isn't over age 59 1/2 nor have the funds been kept in the Roth IRA for the required 5 taxable years.
Don't confuse a penalty beater provision with a qualified distribution from a Roth IRA. They are completely separate and apart.>>

And the response was:

<<With all due respect fellow fool, I believe you are incorrect. The following quotes from Pub 590 indicate otherwise:

"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)...">>

And I'll have to respectfully disagree with your disagreement. This statement appears to say what I said in my paragraph, right? You don't include in your income qualified distributions **OR** distribution that are a return of your original contributions.

As I noted in my original response, the return of the original contributions would not be taxable, but neither would they be deemed qualified distributions. They just aren't taxable...they are simply a return of original contributions.

<<"What Are Qualified Distributions?
A qualified distribution is, generally, any payment or distribution from your Roth IRA made after the 5-taxable-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit if the payment or distribution is:
1) Made on or after the date you reach age 59 1 /2 ,
2) Made because you are disabled,
3) Made to a beneficiary or to your estate after your death, or
4) One that meets the requirements listed under First home in chapter 1 (up to a $10,000 lifetime limit).">>

Right...I have no quarrel with what you have written here. None whatsoever.


<<Contributions can be removed tax free.>>

Correct. Anytime.

<< Anytime after the five year period, the earnings (up to the $10000 limit) can then be taken for 1st home purchase without being included in gross income or taxed.>>

That's correct also. But perhaps we're simply looking at things differently. Because of the ordering rules, you are REQUIRED to pull out contributions first...before earnings. So if you make 5 years of contributions, the first $10k that you'll pull out ARE contributions...not taxed but also not qualified distributions. And your lifetime distribution from an IRA for qualified first time home purchase is $10k. You might think that you could take $10k in your original contributions and then $10k in "earnings" and still be within the limit. I would disagree. You get your bite at only one $10k apple.

If you only make $2k of contributions, and that grows to $10k over a five tax year period, and you take a $10k distributions for a qualified first time home purchase, you'll be receiving $2k of contributions returned to you, and $8k of "earnings". These "earnings" WOULD be qualified distributions, not subject to taxes or penalties. But this is only after the five tax year period has passed...and not before. If you remove the earnings before the five tax year period has passed, you'll still avoid the penalty on the earnings, but not the tax.

So I think that we might be saying the same thing, only using different phrasing. If you still think that we are in disagreement, please let me know and I'll try again to explain my position.

TMF Taxes
Roy

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39432 of 121323
Subject: Re: Using an IRA to save for a Home Date: 9/1/2000 7:11 PM
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<<Now I'm really confused. Why in the world would you want to "use up" the $10000 qualification for first-time homebuyers by removing contributions?>>

Because, in some cases, you simply have no choice.

<< They can be removed without being taxed anyways.>>

Right...but they are required to be the FIRST to be removed under the Roth IRA ordering rules.

<< I repeat the quote from Pub 590 "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)..." If qualified distributions and contribution withdrawals are not included in gross income, how would they be taxed?>>

Keep reading in Pub 590 and you'll answer your own question. Additionally, you'll also find a worksheet in Pub 590 that helps to walk you through the taxable vs. non-taxable distribution from a Roth IRA. You might want to check that out also.

Here is the quote from Pub 590 of most interest to you:

Ordering Rules for Withdrawals

If you make a withdrawal from your Roth IRA that is not a qualified distribution, part of the withdrawal may be taxable. For purposes of determining the correct tax treatment of withdrawals (other than the withdrawal of excess contributions and the earnings on them, discussed earlier), there is a set order in which contributions (including conversion contributions) and earnings are considered to be withdrawn from your Roth IRA. The order of withdrawals is as follows.

1) Regular contributions.

2) Conversion contributions, on a first-in-first-out basis (generally, total conversions from the earliest year first). See Aggregation (grouping and adding) rules, later. These conversion contributions are taken into account as follows:

a) Taxable portion (the amount required to be included in gross income because of conversion) first, and then the
b) Nontaxable portion.

3) Earnings on contributions.

Rollover contributions from other Roth IRAs are disregarded for this purpose.

Hopefully these two posts, plus the information provided by Phil will help you understand the issues more clearly.

TMF Taxes
Roy


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Author: Fool4now2 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39444 of 121323
Subject: Re: Using an IRA to save for a Home Date: 9/1/2000 9:29 PM
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So I think that we might be saying the same thing, only using different phrasing. If you still think that we are in disagreement, please let me know and I'll try again to explain my position.

I understand your position. 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.

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Author: TMFExRO Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39448 of 121323
Subject: Re: Using an IRA to save for a Home Date: 9/1/2000 11:46 PM
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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.

TMF ExRO
Phil Marti

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Author: TMFExRO Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39454 of 121323
Subject: Re: Using an IRA to save for a Home Date: 9/2/2000 11:11 AM
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Hopefully these two posts, plus the information provided by Phil will help you understand the issues more clearly.

Hope springs eternal, but....

Just when I thought I had this all figured out with my post last night, I had another thought as I was trying to go to sleep. To set the stage, we're dealing with a Roth that meets the 5 year rule. There have been $14,000 in contributions and $10,000 in earnings. The issue is whether the earnings can be withdrawn tax-free as a qualified distribution.

I've been arguing that the first $10,000 withdrawn constitutes the "qualified" distribution for first-time homebuyers and thus leaves nothing available when we get to the earnings. My question now is why does that first $10,000 have to be applied to the first-time allocation.

What if the taxpayer simply withdraws the $14,000 of contributions, not allocating them at all to the home purchase? It would seem to me that he could then say that withdrawing the $10,000 in earnings was a qualified distribution not subject to tax.

Thoughts?

TMF ExRO
Phil Marti

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Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39455 of 121323
Subject: Re: Using an IRA to save for a Home Date: 9/2/2000 11:17 AM
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TMFExRO writes (in part):

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.

I reply:

Why would anyone do that, though? If I were in that situation, I'd make two different withdrawals. First, I'd withdraw my $10,000 in contributions, a transaction that is not subject to taxation. Then I'd withdraw the remainder, and use the home-purchase rule to escape penalty on $10,000 in earnings. --Bob

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Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39456 of 121323
Subject: Re: Using an IRA to save for a Home Date: 9/2/2000 11:20 AM
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TMFExRO writes (in part):

My question now is why does that first $10,000 have to be applied to the first-time allocation.

I reply:

Great minds think alike. See post no. 39455. --Bob

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Author: Fool4now2 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39460 of 121323
Subject: Re: Using an IRA to save for a Home Date: 9/2/2000 1:00 PM
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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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