8606 Question

[Dave T]

T/p's both over 59 1/2. Over the past three years they convert traditional IRAs to Roth IRAs, $12,000 each year. ( 2019-2021)

In 2021 they take a distribution from the Roth for new home. The 1099R shows the $10,500 as zero taxable, but with code T, exception applies.  I assume the exception is that due to not being held for 5 years and thus now shows as taxable on the 1040.

I then start   inputting the 8606 showing the $10,500 on line  19 as a distribution and $36,000 as basis in the Roth and all of a sudden the distribution is no longer taxable.  

Any thoughts as to what I might be missing on this?

Thank you in advance.

 

[TexTaxToo]

The "basis" is not taxable, and unlike regular non-deductible IRAs, with Roth IRAs the basis is treated as being withdrawn first.  So they can withdraw $36,000 with no tax due.  And since they are over 59 1/2, there is no penalty.

[Slippery Pencil]

There's an exception for 1st time home buyer up to 10K.

Withdraws up to basis are tax free.

If they had another ROTH opened more than 5 years ago, they meet the 5 year rule.

[TexTaxToo]

There's a separate 5-year period for each conversion. 

There's one 5-year period for direct contributions.  The clock starts with the first.

The home buyer exception is only for the penalty (10% additional tax) which doesn't apply anyway if over 59 1/2.

[Slippery Pencil]

Yes, the conversion rule.  Forgot about that.

[TexTaxToo]

29 minutes ago, Slippery Pencil said:

There's an exception for 1st time home buyer up to 10K.

You're right.  The first 10K applies to regular tax as well as the penalty.

[Dave T]

There were no other Roths and the first conversion was in 2019 so they don't meet the 5 year rule. Seems that the 2021 distribution s/b taxable.

The $10K distribution wasn't for a first time homebuyer, just a downsize.

[Slippery Pencil]

2 hours ago, Dave T said:

Seems that the 2021 distribution s/b taxable.

No it doesn't.

[Dave T]

What am I missing then?  There are no other Roths and they don't meet the 5 year rule.

Thank you.

[Gail in Virginia]

1 hour ago, Dave T said:

What am I missing then?  There are no other Roths and they don't meet the 5 year rule.

Thank you.

They have BASIS in their Roth that has previously been taxed and they have not withdrawn enough to use up their basis.