Roth withdrawals when balance < contributions

[am_vanquish]

A purely conceptual question (inspired by the other thread about Roth withdrawals):

Roth contributions can be taken out without taxes/penalties. Earnings will be subject to taxes/penalties. What if your earnings are negative? What if I put in $5,000 before "the crash" --> it grew to $6,000 --> lost 40% of its value --> and now I've only got $4,000 in there?

How much could I take out? Would any be subject to taxes/penalties?

[jIM_Ohio]

If you put $5000 in as a contribution
then you can take no more than $5000 out as a distribution penalty free

Even if the $5000 was originally $50 shares and you owned $100, and based on market performance you now had $40 shares and 120 of them ($4800 total). You can get a $4800 distribution penalty free in this example and the other $200 is "lost".

The IRS is only using "absolute" account values- not the shares owned, or how the shares split or generated revenue into account.

So if you put $5000 in, the IRS considers the first $5000 you withdraw as a contribution and the $5001st dollar is earnings. If account is less than contributions made, distributions are penalty free.

[moneybags]

You can also take a loss in this situation (if you withdraw) on your schedule A as a misc deduction subject to the 2% limit. So, $5000 initial investment, $4000 current value withdrawn, $1000 loss added to misc ded on schedule A, only excess of 2% of AGI deductible (combined with any other misc ded). It is not much - nothing like taking it as a capital loss.

[jIM_Ohio]

You can also take a loss in this situation (if you withdraw) on your schedule A as a misc deduction subject to the 2% limit. So, $5000 initial investment, $4000 current value withdrawn, $1000 loss added to misc ded on schedule A, only excess of 2% of AGI deductible (combined with any other misc ded). It is not much - nothing like taking it as a capital loss.

Are you sure? If the gains/losses are tax deferred, there is no double tax benefit allowed. Can you point to an IRS publication which allows this?

[am_vanquish]

If you put $5000 in as a contribution
then you can take no more than $5000 out as a distribution penalty free

Even if the $5000 was originally $50 shares and you owned $100, and based on market performance you now had $40 shares and 120 of them ($4800 total). You can get a $4800 distribution penalty free in this example and the other $200 is "lost".

The IRS is only using "absolute" account values- not the shares owned, or how the shares split or generated revenue into account.

So if you put $5000 in, the IRS considers the first $5000 you withdraw as a contribution and the $5001st dollar is earnings. If account is less than contributions made, distributions are penalty free.

Jim, this is why I love your posts. They're so complete - you kinda read my mind.

This is where I was going next. My real question was if I had 2 separate contribution points:
(1) Invested $5,000 at 1/1/07, it took a hit during the "crisis" and is worth $4,000 at 1/1/10
(2) Invested $1,500 at 1/1/09, it took advantage of the "recovery" and is worth $3,000 at 1/1/10.

So, I've contributed $6,500 and my account balance is $7,000. However, positive earnings represent about $1,500. My question would be: can I take out the full $6,500 I contributed OR only $5,500 ($4,000 from first contribution + $1,500 from second contribution).

Based on Jim's response, the IRS doesn't care how my $6,500 in contributions got to a $7,000 account balance. I can take out $6,500.

[loulou]

Are you sure? If the gains/losses are tax deferred, there is no double tax benefit allowed. Can you point to an IRS publication which allows this?

Page 9 of Publication 529.

[jIM_Ohio]

Page 9 of Publication 529.

I am looking at this

http://www.irs.gov/pub/irs-pdf/p529.pdf

Its page 11

Loss on IRA ·
If you have a loss on your traditional IRA (or Roth IRA)
investment, you can deduct the loss as a miscellaneous
itemized deduction subject to the 2% limit, but only when
all the amounts in all your traditional IRA (or Roth IRA)
accounts have been distributed to you and the total distri-
butions are less than your unrecovered basis. For more
information, see Publication 590, Individual Retirement Arrangements
(IRAs).

learn something new everyday
thx