@qbteachmtI acknowledge that the amount subject to penalty I gave for scenario 2 was incorrect and I agree with your answer. I used this example to show that the first home purchase is not an exception for the 5-year rule, it does not reduce the taxable amount but only the amount subject to penalty. I made an error in amount subject for penalty because I was mistook the 2016-2019 direct contributions as conversions. So the following should be true, agree? If so, then we are on the same page.

(2) taxpayer's age is 30:

- 2020: distribution 33000
- 2016: direct contribution 5000
- 2017: direct contribution 5000
- 2018: direct contribution 5000
- 2019: direct contribution 5000
- earning: 13000
- qualified first time home purchase: 10000

Amount subject to tax is 13000, subject to penalty is 23000 3000.

(3) taxpayer's age is 30:

- 2020: distribution 33000
- 2016: conversion 5000
- 2017: conversion 5000
- 2018: conversion 5000
- 2019: conversion 5000
- earning: 13000
- qualified first time home purchase: 10000

Amount subject to tax is 13000, subject to penalty is 23000.