Withdrawing backdoor Roth IRA contributions for house purchase

[Riverman22]

Can anyone help explain the rules surrounding withdrawing money from a Roth IRA for a home purchase? I need about $20k fast and unfortunately this might be my best way to get it.

From my understanding you can access Roth IRA contributions at any time as they were already taxed. Does it matter if they were backdoor Roth IRA conversions instead of direct contributions?

Also, what is the rule on first-time home buyers being able to take up to $10,000 of Roth IRA earnings penalty free?

My Roth IRA account is <5 years old, will this affect anything?

Any advice would be helpful, thank you.

[Tim]

jfoxcpacfp would be a good source to respond.
Bump. I think you can only withdraw the contributions without penalty. I think you can pay it back with in 60 days.
https://www.investopedia.com/article...gency-fund.asp

[bovie]

Not sure about the home-buyer stipulations, but yes you can withdraw an amount equal to total contributions without tax or penalty and no it doesn’t matter if they were direct or backdoor.

Do you have a taxable brokerage account? Much better option than the Roth, even if you have to pay gains. But of course just sell highest basis.

[Riverman22]

Not sure about the home-buyer stipulations, but yes you can withdraw an amount equal to total contributions without tax or penalty and no it doesn’t matter if they were direct or backdoor.

Do you have a taxable brokerage account? Much better option than the Roth, even if you have to pay gains. But of course just sell highest basis.

Thank you for that info, I'll be able to just get my contributions I need out then. I may be able to pay back a decent chunk in the next 60 days so that's good to know too.

I do not have a taxable account at this time. I've been practicing less than 3 years and with so many competing needs for my cash so I've just focused on maxing retirement accounts and HSA first. The reason for the additional cash right now is I was anticipating a 5% down payment but ended up needing to do 10%. Locked in a 4.085% APR though which I am happy with.

[bovie]

Thank you for that info, I'll be able to just get my contributions I need out then. I may be able to pay back a decent chunk in the next 60 days so that's good to know too.

That could complicate things a bit, if you’re looking to put the money back in as part of your 2021 contribution—which you’ve already made.

To keep that “re-contribution” option open, you would also need to withdraw any associated earnings on your 2021 contribution to date, and those would be subject to both income tax as well as 10% penalty.

Otherwise, you can just pull out your contributions as discussed prior but you cannot put them back in and have them count “again” for 2021. For years 2020 and prior, this is not an option, of course.

Considering you would have less than a month to re-contribute for 2021 anyway, I suggest you just withdraw contributions and only make new contributions for 2022 going forward. Less mess.

[CordMcNally]

Where's your emergency fund?

[jfoxcpacfp]

Money that goes into your Roth via the backdoor is not contributed, it’s converted. This is an important distinction.

Do you have Roth contributions in addition to backdoor conversions? Your conversions are subject to the 5-yr rule. W/o looking it up, I believe each conversion has its own 5-yr rule, too. You can withdraw direct contribution basis at any time w/o tax or penalty. No growth on the original contributions needs to be withdrawn. If you change your mind, you have to get the $ back in w/i 60 days, and that’s assuming it’s your only use of this “tactic” w/i a year (see next para).

You can withdraw $$ from a retirement account and recontribute it within 60 days once each year. If you don’t get the money back in 60 days, you are 99.8% SOL.

There is no rule allowing a $10k tax- and penalty-free dist from a Roth for a 1st-time homebuyer. The rules for distributions are subject to the above.

[bovie]

And yes, regarding what Tim said above and what you alluded to regarding the return of funds within 60 days (officially a rollover)—you can do this to avoid both taxes and penalties on the withdrawal of both contributions and earnings, but you will be hit with both taxes and penalties if you don’t get it back in.

Not sure what your cash flow is like, but it seems like it might be a bit tight which could make this a bit of a dicey proposition.

[bovie]

^ and now Johanna as well, helpful as usual!

[jfoxcpacfp]

And yes, regarding what Tim said above and what you alluded to regarding the return of funds within 60 days (officially a rollover)—you can do this to avoid both taxes and penalties on the withdrawal of both contributions and earnings, but you will be hit with both taxes and penalties if you don’t get it back in.

Just to be clear: withdrawals of original contributions that were made to a Roth will not be subject to taxes and penalties if the $$ d/n/go back w/i 60 days. Want to make sure that is not what you meant.

[bovie]

Just to be clear: withdrawals of original contributions that were made to a Roth will not be subject to taxes and penalties if the $$ d/n/go back w/i 60 days. Want to make sure that is not what you meant.

Correct. Should have been more clear.

OP, I think you are best off just withdrawing contributions and not touching earnings, if possible. I don’t recall if you mentioned what your basis is and whether that will cover your needs.

Will be cleaner that way, and not open you up to tax and penalty liability should you fail to return the funds within 60 days.

[jfoxcpacfp]

One more thought - those of you with old “direct contribution” Roth IRAs should be keeping a spreadsheet of your various entries if you’re not already doing so. Form 8606 keeps track when you begin doing backdoor Roth conversions but is not required for Roth contributions. I’ve had to ask several new clients to provide this history and it’s a huge hassle if they have had Roth’s for awhile, especially when custodian changes are involved. Think about it - there is no tax record for Roth contributions (unless you qualify for the retirement credit every year). Much better - and actually kind of gratifying - to keep that annual spreadsheet and watch how your contributions have grown into a bundle of tax-free moolah over the years. You can make a column for contributions, conversions, and rollovers from qualified plans (another 5-yr rule trap). Then you’ll know how much basis you have to take out, if you need to. When the 5-yr mark is passed, transfer that amount from the conversion column to the basis column.

If you fall into this category and don’t have these records, go ahead and do it now and give a copy to your tax preparer. Also especially helpful for beneficiaries when the time comes.

Hope this all make sense - typing as I think.

[Riverman22]

Correct. Should have been more clear.

OP, I think you are best off just withdrawing contributions and not touching earnings, if possible. I don’t recall if you mentioned what your basis is and whether that will cover your needs.

Will be cleaner that way, and not open you up to tax and penalty liability should you fail to return the funds within 60 days.

This is the way I am going to go, thanks. My contributions can cover the amount I need to so reason to mess with earnings.

[Riverman22]

Money that goes into your Roth via the backdoor is not contributed, it’s converted. This is an important distinction.

Do you have Roth contributions in addition to backdoor conversions? Your conversions are subject to the 5-yr rule. W/o looking it up, I believe each conversion has its own 5-yr rule, too. You can withdraw direct contribution basis at any time w/o tax or penalty. No growth on the original contributions needs to be withdrawn. If you change your mind, you have to get the $ back in w/i 60 days, and that’s assuming it’s your only use of this “tactic” w/i a year (see next para).

You can withdraw $$ from a retirement account and recontribute it within 60 days once each year. If you don’t get the money back in 60 days, you are 99.8% SOL.

There is no rule allowing a $10k tax- and penalty-free dist from a Roth for a 1st-time homebuyer. The rules for distributions are subject to the above.

Hmm interesting. Say I have direct contributions of $15k and the additional $5k I need is from a backdoor conversion. I ended up not even technically needing to do a conversion because I qualified for the direct contribution but it was my first year out of residency and I was unsure if my income would reach the limit or not. If my converisons are less than 5 years old, I can't withdraw them penalty free?

[Lordosis]

If you can pay it back maybe a 401K loan?