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I withdrew money from my Roth IRA (let's say $5K in contributions and $6K in earnings) to buy a house, and then I didn't buy a house. Oops. How can I return or undo this withdrawal to avoid paying taxes and penalties at the end of the year?

marked as duplicate by littleadv taxes Jun 26 '14 at 6:06

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  • How many days ago? – mhoran_psprep Jun 25 '14 at 23:43
  • It was on 4/14, so about 70 days give or take. – mwp Jun 25 '14 at 23:49
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    It took me a while to find the excellent and right on the point answer @JoeTaxpayer wrote a while ago, but I found it:-) – littleadv Jun 26 '14 at 6:07
  • Have you ever purchased a home before this? And are you over or under 50 years old? – TTT Jun 26 '14 at 13:16
  • Thanks littleadv, I'll take a look. TTT, this would have been my first home purchase, and I am under 59 1/2 years old. – mwp Jun 26 '14 at 19:12

Because it is a Roth IRA (not traditional), you never pay penalties for withdrawing any amount up to your total contributions amount. This is because you are funding it with after tax money.

But it sounds like your Roth had $11K in it and you zeroed it out? If you were less than 59.5 years old at the time you made the withdrawal, then if you did not return anything to the account, then you would pay tax on the 6K as income this year at your normal tax rate, plus an additional 10% penalty on that 6K ($600). The 5K in contributions is not taxable. Now, since it's been more than 60 days since you withdrew the money, you cannot put the 6K in earnings back in without paying the penalty, however, you can still contribute $5500 per year (or $6500 if you're over 50). So, you can put back $5500 and then you would only have to pay tax + 10% on the $500 difference.

Update: I would recommend talking to an accountant. The fact that you intended to buy a house might provide a mechanism for getting the money back in if you wish. If this was your first house or you have not owned a home in the last 2 years, then you would be considered a "first-time homebuyer" and there is a special exception allowing you to remove 10K without penalty. If you end up not purchasing the home, you have 120 days to contribute those funds back in (treated as a rollover- thank you littleadv for the link to this). As for the final 1K overage, I believe you can count that towards your $5500/yr contribution when you put the entire amount back.

Lastly, after digging into this, you have hit so many edge cases with your scenario (6K in earnings being between 5500 for under 50 and 6500 for over 50, it's been 70 days which is between the 60 day normal cutoff and the 120 day extended cutoff for home purchase falling through, and 11K total being just over the 10K cutoff for the same), that I'm starting to wonder if this is some sort of contrived case for an accounting exam!?

  • This answer is incorrect for this specific situation (although it would be correct for a distribution in general). – littleadv Jun 26 '14 at 6:08
  • @littleadv - what is incorrect about it? We don't know yet if the distribution was for the "first" house. And even if it is, 11K is over the 10K limit so it isn't a cut and dry answer like the linked-to post. I've asked some more questions in the comments to clarify this. – TTT Jun 26 '14 at 13:18
  • It's not contrived for an exam. I wish! ;) If I can withdraw contributions at any time, then (I think) I only have to worry about returning the $6K in earnings. – mwp Jun 26 '14 at 19:15
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    @mwp - yes- just make sure you take care of it before the 120 days is up. I've convinced myself that you can just put the 6K back without any issue- reason being, you take out the 5K because it's principle and you can do that anytime. Then you took out 6K in earnings for the home which is less than 10K, so you wouldn't have gotten a penalty if you bought the home. Now you have 120 days to put the 6K back to avoid any penalties. – TTT Jun 27 '14 at 18:39

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