3673 / How are amounts distributed from a Roth IRA taxed?
(1) It is made on or after the date on which the individual attains age 59½.(2) It is made to a beneficiary (or to the estate of the individual) on or after the death of the individual.
(3) It is attributable to the individual’s being disabled (within the meaning of IRC
Section 72(m)(7)).(4) It is a “qualified first-time homebuyer distribution” (see below).
A “qualified first-time homebuyer distribution” is any payment or distribution that is used within 120 days after the day it was received by the individual to pay the qualified acquisition costs of a principal residence for a first-time homebuyer.2 The aggregate amount of payments or distributions received by an individual from all Roth and traditional IRAs that may be treated as qualified first-time homebuyer distributions is limited to a lifetime maximum of $10,000.3 The first-time homebuyer may be the individual, his or her spouse, or any child, grandchild, parent, or other ancestor of the individual or his or her spouse. A first-time homebuyer is further defined as an individual (and, if married, such individual’s spouse) who has had no present ownership interest in a principal residence during the two year period ending on the date of acquisition of the residence for which the distribution is being made.4 The date of acquisition is the date on which a binding contract to acquire the residence is entered into or the date construction or reconstruction of the residence begins.5 Qualified acquisition costs are defined as the costs of acquiring, constructing, or reconstructing a residence, including reasonable settlement, financing, or other closing costs.6
Planning Point: Although the first-time homebuyer exception allows a taxpayer to avoid paying taxes on earnings, an individual should consider the non-tax consequences of such a distribution. There is an “opportunity cost” associated with taking early distributions. By taking a distribution from a Roth IRA, the Roth funds are depleted and the individual could lose out on significant account growth over time.
In calculating the five-taxable-year period, it is important to remember that contributions to Roth IRAs, as with traditional IRAs, may be made as late as the due date for filing the individual’s tax return for the year (without extensions) ( Q 3655). For example, if a contribution is made to a Roth IRA between January 1, 2025 and April 15, 2025 for the 2024 taxable year, the five-taxable-year holding period begins to run in 2024.
For purposes of determining whether a distribution from a Roth IRA that is allocable to a “qualified rollover contribution” ( Q 3662) from a traditional IRA is a “qualified distribution,” the five-taxable-year period begins with the taxable year for which the conversion applies. A subsequent conversion will not start the running of a new five-taxable-year period.7