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Withdrawing backdoor Roth IRA contributions for house purchase

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  • #16
    Originally posted by jfoxcpacfp View Post
    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.
    This +1.
    First time I heard a reason for keeping a “ledger” and updating for a Roth. Just always assumed funds would stay in until 59.5 yrs old.
    Would be pretty easy for Fidelity or Vanguard to allow each type of deposit to be assigned a trans type and basis for a Roth.


    • #17
      Originally posted by Riverman22 View Post

      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?
      That is correct. It doesn’t matter that you “could” have skipped the conversion, but that you converted rather than contributed. Honestly, this will have no impact for the huge majority of readers here, but it does come up in random situations. I don’t think you’ll ever regret keeping track - it’s actually interesting to follow. Be sure to keep a date column on the ss so you’ll know when the conversions are out of jail.
      Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


      • #18
        The “R” in IRA stands for “retirement”. This is not an Individual Buy-a-House Account.

        While there may be a case for taking a one-time loan against your retirement assets and promptly repaying it, you shouldn’t permanently remove funds from your retirement account before you retire.


        • #19
          Also, are you really ready for home ownership of you can’t swing a short notice $20K expense without raiding your retirement accounts?

          What if you have to replace a roof, the air conditioner in the summer, or the furnace in the winter? Material and labor have gone up in price quite a bit. More so in desirable locations where people have been moving over the last couple years. Good tradesmen are difficult to find and not cheap when you find them. The cost of housing related items has gone way up.

          There’s no landlord to pay for these repairs; you’re on the hook as the homeowner.