Withdrawal From Roth

[Guest NLONEY]

In early 2001 taxpayer makes 2000 contribution to a new roth.

When the time comes to file thier 2001 tax return, he discovers that his income is too high for a Roth. He does not want to recharacterize as a regular IRA. He must withdraw the $2000 & any earnings before the due date of the tax return. The earnings are taxable.

What is the tax impact if the $2000 had been invested & the investment had fallen in value to $700 at the time of withdrawal?

Can they take the $1300 loss?

If so, what kind of loss?

Thanks.

[JAMES PATRICK]

If the T/P closes all Roths than $1300 would be listed as loss on Schedule A subject to 2% of AGI. However since T/P is not eligible to contribute, than AGI would most likely be too high to use the loss.

[txdd]

The taxpayer might want to reconsider his decision not to recharacterize to a traditional IRA.

If he does not already have a traditional IRA, then the recharacterized contribution would give him a $700 balance with a $2000 basis. If left as his sole traditional IRA, it can grow by almost 200% before any withdrawal becomes taxable. This is almost as good as a Roth.

Even if the TP has other traditional IRA's, recharacterizing would decrease his ultimate taxable income by $1300 since his tax free basis would go up by $2000.

Either outcome would seem to be a better deal than withdrawal since, as James pointed out, it's unlikely he will be able to deduct his loss.