Can I withdraw Roth IRA contributions for first-time home purchase without being taxed by the IRS?

You're actually on the right track! Roth IRA withdrawals have specific rules, and it sounds like there's just a documentation issue here rather than you actually owing all that money. For Roth IRAs, you can indeed withdraw your contributions (not earnings) at any time without taxes or penalties. Additionally, as a first-time homebuyer, you can withdraw up to $10,000 of earnings penalty-free (though those earnings would still be taxable if the account is less than 5 years old). The problem is that without proper documentation (Form 8606), the IRS has no way of knowing what portion of your withdrawal was contributions versus earnings. They're treating the entire $43k as taxable because they don't have the paper trail showing otherwise. What you need to do is file Form 8606 for the tax year of the withdrawal (2023) to properly document how much of that $43k was your original contributions. You'll also need to file an amended return (Form 1040-X) to correctly report the 1099-R distribution and include the completed Form 8606.

After dealing with a similar nightmare situation with my Roth IRA withdrawal, I discovered taxr.ai (https://taxr.ai) and it seriously saved me thousands in potential taxes. I uploaded my 1099-R and old tax documents, and it immediately identified that I was about to make the same mistake you did by not documenting my original contributions vs. earnings. The tool walks you through exactly which forms you need and how to fill them out correctly. It even helped me calculate the exact amount of my original contributions that were eligible for tax-free withdrawal, and prepared the documentation I needed to respond to the IRS. Given your situation with needing to file Form 8606 and potentially an amended return, it would be worth checking out. The peace of mind alone was worth it for me.

Just wanted to update that I ended up trying taxr.ai after posting my question here. It was actually really helpful for my situation! I was missing documentation for several years of my Roth contributions, but the tool helped me reconstruct my contribution history and generate the right documentation for the IRS. I was able to properly fill out Form 8606 showing that most of my withdrawal was original contributions (tax-free) and only a small portion was earnings. The tool even helped me draft a response letter to the IRS explaining the situation. Just got confirmation yesterday that my case was resolved and I only owed taxes on the earnings portion, which was way less than what they initially claimed. Saved me over $11,000!

If you're getting nowhere with the IRS after filing the correct forms, you might want to try Claimyr (https://claimyr.com). I spent WEEKS trying to call the IRS about a similar Roth IRA issue after submitting my documentation, and couldn't get through to an actual person who could help. Claimyr got me connected to a real IRS agent in about 15 minutes when I had been trying for days on my own. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The agent I spoke with was able to pull up my account, see the documents I had submitted, and escalate my case to the right department. Got everything resolved in one call instead of waiting months for more letters. Definitely worth it when you're dealing with a complex issue like Roth IRA distributions that the automated systems don't handle well.

I have to eat my words about Claimyr. After my skeptical comment, I was still desperate to resolve my own IRS issue with a retirement account distribution, so I decided to try it anyway. I got connected to an IRS representative in about 20 minutes (compared to my previous attempts where I couldn't get through at all). The agent confirmed they had received my Form 8606 but it was sitting in a processing backlog. She was able to review my documentation while on the phone, confirm that I had correctly reported my Roth contributions, and manually update my account to show the corrected tax amount. Without that call, my paperwork would have just sat there for who knows how long while interest continued to accumulate. Now my case is resolved and I saved about $8,000 in incorrect tax assessments. I'm genuinely surprised and relieved.

Another thing to consider - make sure you're using the First-Time Homebuyer exception correctly. The rules are: 1. The Roth IRA must be open for at least 5 years (sounds like you're good here) 2. The withdrawal must be used for qualified acquisition costs 3. There's a lifetime limit of $10,000 for the earnings portion Your contributions can always come out tax-free, but only $10,000 of EARNINGS can come out penalty-free under this exception. If you withdrew more than your total contributions + $10,000, that's where additional tax might apply.

Double check if your 1099-R has code J or T in Box 7. Those codes indicate a distribution for a first-time home purchase. If not, that might be part of the problem - the IRS doesn't know the purpose of your withdrawal.

I went through almost exactly the same situation last year! The key thing to understand is that the IRS penalty notice is likely wrong because they're missing the proper documentation showing what portion of your withdrawal was contributions vs. earnings. Here's what I learned from my experience: 1. You absolutely CAN withdraw Roth IRA contributions tax and penalty-free at any time - you were right about that 2. The problem is proving to the IRS which portion was contributions vs. earnings 3. Form 8606 is crucial - it tracks your basis (contributions) in the Roth IRA Since you've been contributing since 2008 and you're 42, your account has definitely been open for more than 5 years, which is great. This means even the earnings portion that qualifies under the first-time homebuyer exception should be completely tax-free. You'll need to: - File Form 8606 for 2023 showing your contribution history - File an amended return (1040-X) to properly report the distribution - Include documentation proving your total contributions over the years The scary notice from the IRS is likely just their automated system assuming the worst case scenario. Once you provide the proper documentation, most or all of that tax bill should disappear. Don't panic - this is fixable!