Loss in Roth IRA

Mar 12, 2010 2 Replies
L

If there is a better group to post this question, please let me know.



I'm over 59 1/2. 6 years ago I coverted some of a traditional IRA ( say, $8,000) into a Roth IRA and paid the necessary taxes to do so. Then the market tanked. My Roth IRA is now worth $4000.



Suppose I now convert from my traditional IRA another $9000 into the same Roth, paying the conversion tax, of course. My Roth now has $13,000, $4000 from the original and $9000 that I just did.



Can I draw out $8000 without paying a penalty for early withdrawal? Because of the loss in the original conversion $4000 would have to come from the conversion ($9000) I just did and yet I originally, over 5 years ago, converted $8000. I hope the source of my confusion is clear.



Most of the tutorials I find always assume that you have a profit. Oh, if life were always so kind.


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A

contributions and conversion amounts any time.

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T

Because you are over age 59 1/2, there is never a penalty for early withdrawal from the Roth IRA. Your basis in the Roth (before doing the conversion you are considering) is still $8,000. I think you should consider what happens if you liquidate your Roth IRA entirely. That gives you a $4,000 "unrecovered basis" that becomes a miscellaneous itemized deduction. If you can surmount the 2% floor and can otherwise itemize deductions, and avoid AMT (that's a lot of hurdles to overcome!), that gives you a current tax break on your 2010 return. After you've cleaned out the Roth IRA, you can then do the conversion later in the year (or maybe 2011), and begin a new Roth IRA.

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