Received a Letter from IRS - Claiming My Roth IRA Home Purchase Withdrawal was Taxable?

So I bought my first house back in 2023 and to help with the down payment, I took out $15,000 from my Roth IRA with Fidelity. After the withdrawal, I still had about $13,500 sitting in the account. I've been putting in around $4,000-$6,000 each year for several years before this. My total market gains were only about $5,500 at that point. Well, yesterday I got this letter from the IRS claiming I owe approximately $6,500 in taxes on that $15,000 withdrawal. The letter says I should file Form 8606 if I believe the amount isn't actually taxable. From what I've always understood, I can take out up to the amount I've contributed to my Roth IRA without any tax penalties since that money was already taxed when I put it in - I just can't touch the earnings without paying taxes (unless I'm retirement age). So like, if I've contributed $19,000 total over the years and my account grew to $24,500 because of market gains, I should be able to withdraw up to $19,000 tax-free, right? And if I were to withdraw $21,000, only the $2,000 that comes from earnings would be taxable? Is my understanding correct here? Has anyone dealt with this kind of IRS letter before? I'm kinda freaking out about owing $6,500 I wasn't expecting!

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18 comments

Isabella Santos

•8M

You're definitely on the right track with your understanding of Roth IRA withdrawal rules. With Roth IRAs, contributions can always be withdrawn tax and penalty-free at any time since you've already paid taxes on that money. The earnings portion is what would typically be subject to taxes and potential penalties if withdrawn before age 59½ without meeting an exception. For your situation, it sounds like you've contributed well over $15,000 over the years, so your withdrawal should indeed be considered a return of contributions, not earnings. The IRS letter is likely due to a reporting issue - Vanguard probably reported the distribution to the IRS without specifying it was a return of contributions, causing the automated system to flag it as potentially taxable. You should absolutely file Form 8606 Part III to clarify that your distribution was a return of contributions. You'll also want to check how the distribution was reported on your 1099-R from Vanguard. Sometimes the distribution codes on the 1099-R don't properly reflect that this was a non-taxable withdrawal of contributions.

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Isabella Santos

•8M

Code J actually indicates an early distribution from a Roth IRA where the distribution may be subject to penalties - this is likely why the IRS is asking for clarification. For a non-taxable return of contributions, you'd typically want to see Code Q (qualified distribution) or at least Code T (indicating exception applies). You'll need to file Form 8606 Part III to show your basis in Roth contributions, proving that your withdrawal was less than your total contributions. You'll likely need to file an amended return (Form 1040-X) to include this form, as it affects your tax liability. Make sure to keep documentation of all your past Roth contributions to substantiate your position if questioned further.

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Ravi Gupta

•8M

I went through almost the exact same situation last year when I used my Roth IRA for a down payment. The IRS system automatically flags these distributions because the reporting from financial institutions is often incomplete. After dealing with this mess, I found the best solution was using https://taxr.ai to help organize all my contribution records and generate the proper documentation. The key was proving my contribution history to show I was only taking out what I had put in. The taxr.ai system analyzed all my previous statements and created a perfect record of contributions that satisfied the IRS requirements. It saved me from having to manually track down years of contribution receipts, which was a nightmare since I'd switched brokerages twice.

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Ravi Gupta

•8M

It works by either connecting to your accounts where possible or by analyzing statements you upload. For accounts across multiple brokerages, you just upload the annual statements from each one and it extracts the contribution data automatically. Even if you're missing some statements, it can often fill gaps based on other documentation. The service specializes in retirement account issues including Roth IRA distributions. It generates a complete contribution history with all the calculations the IRS requires, and provides the exact numbers you need for Form 8606. It also creates a documentation package that shows exactly how your basis was calculated, which is critical if the IRS questions your claims. They also offer audit support if you face further questions from the IRS after filing.

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Freya Pedersen

•8M

I was super skeptical at first about using an online service for my IRS issues, but after getting a similar letter about my Roth withdrawal, I decided to try https://taxr.ai based on recommendations here. Complete game changer! The system found contribution records I had completely forgotten about from an old brokerage. Turns out I had contributed about $4,200 more over the years than I had documentation for. They generated a perfect Form 8606 with all my contribution history clearly documented, and included a letter explaining exactly why my distribution wasn't taxable. I sent everything to the IRS three weeks ago and just got confirmation yesterday that they accepted my documentation and closed the case with no taxes owed. The peace of mind was totally worth it after stressing about potentially owing thousands in unexpected taxes.

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Omar Fawaz

•8M

I had this same problem but even after submitting Form 8606, the IRS kept sending me notices. Tried calling them for WEEKS with no success - constant busy signals or being on hold for hours only to get disconnected. Super frustrating. Finally used https://claimyr.com and their system got me connected to an actual IRS agent in about 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c. The agent was able to see my 8606 form in their system and confirmed that my Roth distribution wasn't actually taxable since it was under my contribution amount. They closed the case immediately while I was on the phone.

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Omar Fawaz

•8M

It's not a callback system - they use technology to navigate the IRS phone tree and wait on hold for you. When they reach a live agent, you get a call connecting you directly. It saved me from spending hours on hold only to get disconnected like what happened my first three attempts. There's definitely a cost involved, but considering I was potentially on the hook for thousands in incorrect tax assessments, it was worth it to me. I literally spent over 8 hours across multiple days trying to reach someone with no success before using this. Sometimes your time is worth more than the cost of the service, especially when you're dealing with IRS deadlines.

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Diego Vargas

•8M

I'm eating crow here and need to apologize. After my skeptical comment, I still couldn't get through to the IRS after trying for another week about my own Roth IRA distribution issue. Out of desperation, I tried the Claimyr service. I was connected to an IRS agent in about 35 minutes (they estimated 30-40). The agent was able to look at my account and confirm they had received my 8606 form showing my Roth contributions but it hadn't been processed yet. She manually reviewed it while on the call and removed the proposed tax assessment right then. For anyone dealing with these Roth IRA letters, definitely file the 8606 showing your contribution history, but also consider getting direct confirmation from an agent that it's been properly applied to your account. Saved me from getting more incorrect notices.

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Anastasia Fedorov

•8M

Make sure you also check if you qualify for the first-time homebuyer exception with your Roth IRA withdrawal! If you haven't owned a home in the previous two years, you can withdraw up to $10,000 of EARNINGS (not just contributions) from your Roth IRA without the 10% early withdrawal penalty for a first home purchase. Your contributions still come out tax and penalty free first, then up to $10k of earnings can come out penalty-free (though earnings are still subject to income tax unless the account is 5+ years old).

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Anastasia Fedorov

•8M

You're asking about a somewhat confusing aspect of Roth IRAs. There are actually two different 5-year rules. The first applies to earnings in general - for earnings to be completely tax-free, your first Roth contribution must have been made at least 5 years before withdrawal, AND you must be 59½ or meet another exception. For the first-time homebuyer exception specifically, if your Roth has been open for 5+ years, then up to $10,000 of earnings used for a first-time home purchase can be both penalty-free AND tax-free. If your Roth hasn't been open 5+ years, the $10,000 of earnings is still penalty-free but would be subject to income tax.

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