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Will I be OK withdrawing from my Roth IRA after tax contributions, or could there be penalties/taxes to consider?

I had recently rolled my 401k over from my previous employer's service provider (Empower Financial), and as part of the rollover I had placed a portion of my after tax contributions into a Roth IRA account as cash. I am now purchasing a new home and would like to withdraw from this account using only the after tax contributions to avoid any taxes or penalties as I believe I am able to do within a Roth IRA. I've verified with the 401k servicing company that the entire amount in this particular Roth had been pulled solely from contributions, including no taxable earnings...am I possibly overlooking anything that might result in taxable consequences?

Nov 12, 2015 by Mike in  |  Flag
3 Answers  |  4 Followers
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2 votes

Hi Mike,

Good question. If you are only taking out your contribution and not any earnings then you can withdraw this amount without any tax or penalty. The biggest determinant will be if you deposited the money in a Roth IRA or a Roth 401k with your new employer. I couldn't discern which based on your question. If you put the money in a Roth 401k you could experience penalties and fees, depending on your plan documents.

I would consult with a fee only adviser who can help you out with this question once they have a better understanding of your situation.

Best,

Nathan

Comment   |  Flag   |  Nov 16, 2015

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Richard P Taylor Level 17

Mike, there likely won't be a tax consequence, but there could be a 10% penalty if you are withdrawing prior to you being 591/2 years old. There are a few ways you can escape the 10% penalty (used for higher education), but it would not apply to the purchase of a home (although a first time home would qualify). A disability (hardship), or the heirs settling your estate after you die.

The IRS states that a distribution from your Roth can be tax free and penalty free if you meet some qualifications: The withdrawal must be taken 5 years or more after the account is open.

If you feel like your situation is somewhat complicated, I would highly encourage you to sit down with a financial planner and/or a CPA in your area to make sure you have everything squared away.

Comment   |  Flag   |  Nov 13, 2015

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Lon M Jefferies Level 17

Mike,

I agree with Nathan on this issue. Assuming you rolled the after-tax contributions into a Roth IRA, you can access the entire account balance without penalties or taxes assuming the withdrawal is for the purchase of your first new home.

However, if the distribution isn't directly used for the purchase of your first new home, there may be limitations as to which portions of your account you can access without taxes or penalties. At any time, you are allowed to withdraw the after-tax contributions to your account without incurring the 10% penalty or needing to pay taxes. Be aware, however, that if you take a distribution of an amount over-and-above your contributions to the account (which would be earnings on your contributions), then those distributions may be subject to BOTH the penalty and taxes unless you are over the age of 59.5 and have had money invested in a Roth IRA account for at least five years.

Hope this helps.

-Lon Jefferies

2 Comments   |  Flag   |  Nov 16, 2015 from Salt Lake City, UT
Mike

Thanks Lon, Richard and Nathan...I can confirm that the Roth account I plan on withdrawing from is 6 years old and has a basis of at least 30K (I'm hoping not to take out more than 10K), so I think I'm clear in those regards, and in this particular case the funds would be going towards a home purchase, however, I think where I need to work on a clarification is that of what a first time buyer is in the IRS' eyes. While I've owned homes in other states before, this will be my first home purchase in our current state, and I'm guessing that won't make a difference, but I'll check with a local CPA to verify this if I can.

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Flag |  Nov 16, 2015
Lon M Jefferies

Mike, I think you would have issues in the fact that this is not your first home purchase. The fact that this will be your first home purchased in a given state is inconsequential. Fortunately, this seems to be irrelevant if your cost basis is more than the amount you intend to withdraw. You have the ability to withdraw all of your contributions first, then the distributions of your earnings would follow. Thus, if you have contributed at least $30k to the plan but only intend to withdraw $10k, you will have the ability to do that at any time without taxes or penalties.

Flag |  Nov 16, 2015 near Salt Lake City, UT

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