• For qualified distributions, both contribution and earning are free from tax and penalty.
  • Contribution (basis) can be withdrawn any time without tax and penalty regardless age and how long the account has been opened.

  • Conversion more than 5 years is not subject to penalty.

  • ordering rules (from Pub 590-B page 32):
    • contribution.
    • conversion - taxable (at the time of conversion).
    • conversion - nontaxable (at the time of conversion).
    • earnings.
  • 10% penalty exceptions (from Pub 590-B page 32):
    • 59 1/2
    • disabled
    • beneficiary of deceased
    • first home
    • equal payments
    • medical expenses
    • medical insurance during unemployment
    • high education
    • IRS levy
    • reservist
  • Qualified distribution (from Pub 590-B page 31):
    • account opened >= 5 years AND
    • age >= 59.5 OR disabled OR inherited OR first home up to 10,000.
  • Five year rule: Account opened at least 5 years. Clock starts from January 1 of the year to which you allocate the contribution. Each rollover is accounted for separately.
  • First home: did not buy a home within 2 years, up to 10,000 lifetime limit.

Examples:

In all the examples, the taxpayer is less than 59.5 years old.

Example (1):

  • 2020: distribution 33000
  • 2016: direct contribution 5000: tax: no, penalty: no (is contribution, not conversion)
  • 2017: direct contribution 5000: tax: no, penalty: no (is contribution, not conversion)
  • 2018: direct contribution 5000: tax: no, penalty: no (is contribution, not conversion)
  • 2019: direct contribution 5000: tax: no, penalty: no (is contribution, not conversion)
  • earning: 13000 : tax: yes, penalty: yes (not qualified distribution)
  • qualified first time home purchase: 10000 exception

Since the age of the ROTH IRA account is less than 5 years, so it is non-qualified distribution.

  • Form 8606 line 19 = 33000 (non-qualified distribution including qualified first time home-buyer distributions)
  • Form 8606 line 20 = 0 (less than 5 years)
  • Form 8606 line 21 = 33000
  • Form 8606 line 22 = 20000
  • Form 8606 line 23 = 13000 penalty = 13000 - 10000 = 3000
  • Form 8606 line 24 = 0
  • Form 8606 line 25c = 13000 taxable amount *
  • Form 5329 line 1 = 13000
  • Form 5329 line 2 = 10000
  • Form 5329 line 3 = 3000 penalty amount

Example (2):

  • 2020: distribution 33000
  • 2015: direct contribution 5000: tax: no, penalty: no (is contribution, not conversion)
  • 2016: direct contribution 5000: tax: no, penalty: no (is contribution, not conversion)
  • 2017: direct contribution 5000: tax: no, penalty: no (is contribution, not conversion)
  • 2018: direct contribution 5000: tax: no, penalty: no (is contribution, not conversion)
  • earning: 13000 : tax: yes, penalty: yes (not qualified distribution)

  • qualified first time home purchase: 10000 exception

  • Form 8606 line 19 = 33000
  • Form 8606 line 20 = 10000 (more than 5 years, qualified distribution)
  • Form 8606 line 21 = 23000
  • Form 8606 line 22 = 20000
  • Form 8606 line 23 = 3000
  • Form 8606 line 24 = 0
  • Form 8606 line 25c = 3000 taxable amount *
  • Form 5329 line 1 = 13000
  • Form 5329 line 2 = 10000
  • Form 5329 line 3 = 3000 penalty amount

Example (3):

  • 2020: distribution 33000
  • 2016: taxable conversion 5000: tax: no, penalty: yes (less than 5 years)
  • 2017: taxable conversion 5000: tax: no, penalty: yes (less than 5 years)
  • 2018: taxable conversion 5000: tax: no, penalty: yes (less than 5 years)
  • 2019: taxable conversion 5000: tax: no, penalty: yes (less than 5 years)
  • earning: 13000 : tax: yes, penalty: yes (not qualified distribution)

  • qualified first time home purchase: 10000 exception

  • Form 8606 line 19 = 33000
  • Form 8606 line 20 = 0 (less than 5 years)
  • Form 8606 line 21 = 33000
  • Form 8606 line 22 = 0
  • Form 8606 line 23 = 33000
  • Form 8606 line 24 = 20000
  • Form 8606 line 25c = 13000 taxable amount *
  • Form 5329 line 1 = 33000
  • Form 5329 line 2 = 10000
  • Form 5329 line 3 = 23000 penalty amount

Example (4):

  • 2020: distribution 33000
  • 2012: taxable conversion 5000: tax: no, penalty: no (more than 5 years)
  • 2013: taxable conversion 5000: tax: no, penalty: no (more than 5 years)
  • 2014: taxable conversion 5000: tax: no, penalty: no (more than 5 years)
  • 2015: taxable conversion 5000: tax: no, penalty: no (more than 5 years)
  • earning: 13000 : tax: yes, penalty: yes (not qualified distribution)

  • qualified first time home purchase: 10000 exception

  • Form 8606 line 19 = 33000
  • Form 8606 line 20 = 10000 (more than 5 years)
  • Form 8606 line 21 = 23000
  • Form 8606 line 22 = 0
  • Form 8606 line 23 = 23000
  • Form 8606 line 24 = 20000
  • Form 8606 line 25c = 3000 taxable amount *
  • Form 5329 line 1 = 13000
  • Form 5329 line 2 = 10000
  • Form 5329 line 3 = 3000 penalty amount

Example (5):

  • 2020: distribution 33000
  • 2015: taxable conversion 5000: tax: no, penalty: no (more than 5 years)
  • 2016: taxable conversion 5000: tax: no, penalty: yes (less than 5 years)
  • 2017: taxable conversion 5000: tax: no, penalty: yes (less than 5 years)
  • 2018: taxable conversion 5000: tax: no, penalty: yes (less than 5 years)
  • earning: 13000 : tax: yes, penalty: yes (not qualified distribution)

  • qualified first time home purchase: 10000 exception

  • Form 8606 line 19 = 33000
  • Form 8606 line 20 = 10000 (more than 5 years)
  • Form 8606 line 21 = 23000
  • Form 8606 line 22 = 0
  • Form 8606 line 23 = 23000
  • Form 8606 line 24 = 20000
  • Form 8606 line 25c = 3000 taxable amount *
  • Form 5329 line 1 = 28000
  • Form 5329 line 2 = 10000
  • Form 5329 line 3 = 18000 penalty amount

Example (6):

  • 2021: distribution 10000
  • 2020: taxable conversion 6000: tax: no, penalty: yes (less than 5 years)
  • 2019: taxable conversion 6000: tax: no, penalty: yes (less than 5 years)
  • earning: 0 : tax: yes, penalty: yes (not qualified distribution)

  • qualified first time home purchase: 10000 exception

  • Form 8606 line 19 = 10000
  • Form 8606 line 20 = 0 (less than 5 years)
  • Form 8606 line 21 = 10000
  • Form 8606 line 22 = 0
  • Form 8606 line 23 = 10000
  • Form 8606 line 24 = 12000 (2000 remaining cost basis)
  • Form 8606 line 25c = 0 taxable amount *
  • Form 5329 line 1 = 10000
  • Form 5329 line 2 = 10000 (exception 09 for first time home purchase)
  • Form 5329 line 3 = 0 penalty amount

For conversion less than 5 years, you need to input the year and conversion amount to generate correct Form 5329.

References: