I converted multiple Roth 401(k) accounts from previous employers into a single Roth IRA account. I subsequently took a full distribution of that account to purchase a home. What are the tax implications? I assume I will have to pay tax on earnings. How is that calculated?
A taxpayer can take a tax-free distribution from a Roth IRA of up to $10,000, after holding the Roth IRA for at least five years from the date the Roth IRA was opened. The period the funds were in the Roth 401(k) accounts before conversion does not count.
In addition, no portion of a distribution from a Roth IRA is taxable until the cumulative distributions from all the individual's Roth IRA accounts exceed the total amount of Roth contributions. This is true even if the five-year waiting period has not expired and the taxpayer is not yet age 59 1/2.
If the taxpayer is not yet age 59 1/2, the earnings would be taxable. They would be taxed at the taxpayer’s marginal tax rate based on their tax bracket. Also if under age 59 1/2, the taxpayer would be subject to a 10 percent penalty on those earnings. Form 5329 would be used to assist in determining the portion of the distribution that is taxable, and Form 8606 would be used to calculate the 10 percent penalty. There are certain situations under which the IRS will allow you to withdraw without penalty, which include distributions (up to a $10,000 lifetime limit) made toward the purchase of a first home, to pay for certain medical or higher education expenses, because you became disabled, or distributions made to your beneficiary or your estate after your death.
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Answered by: Daria D. Palaschak, CPA, is a tax partner with Sisterson & Co. LLP in Pittsburgh.