early withdrawal of roth ira converted from traditional ira in 1998

[Guest aker6789]

I converted my traditional Ira to a Roth Ira in 1998 when it was worth $25,000. I have paid taxes over 4 years on the $25,000.

My contribution was $13,000. Now the Roth Ira is only worth $13,000. I would like to take it out before I lose more money. Will I have to pay the 10% early withdrawal penalty? What would my basis be: the original contribution of $13,000 or the $25,000

converted amount?

[BPickerCPA]

The penalty will be based on the value at the time of the withdrawal.

[Guest aker6789]

The value would be $13,000.00 which was my original contribution. You mean I have to pay penalty on my contribution?

[mbozek]

Instead of withdrawing the funds, why not move the Roth IRA investment into something that will not decline in value such as a money market or stable value fund?

[Guest Stiggy]

I'm confused. I thought you could take out your contributions(just not earnings on a Roth)? Sounds like he paid all his taxes on this over 4 years and lost 1/2 of his money.

[Guest franky]

When you say your contribution was $13,000, do you mean nondeductible or deductible? In other words, when you paid tax on conversion, did you pay tax on $25K ($6,250 per year) or $12K ($3,000 per year)? That makes a difference. If $13K was deductible, and it is withdrawn within 5 years of conversion, 10% penalty applies. However, if $13K was nondeductible, and you withdraw only $13K from Roth IRA, there is no penalty. If you wait until 2003 to withdraw, there is no penalty either way. Of course, there is also no penalty if you are over age 59 1/2 or other exception to penalty applies.

[Guest aker6789]

I put in $13,000. deductible Ira over 7 years (2000 a year for 6 years and 1000 for 1 year. In 1998 it was worth $25,000 ($13,000 plus earnings of $12,000). I converted it then to a Roth Ira and paid taxes on the $25,000 ($6250 a year over 4 years)

I want to withdraw the money to invest in real property. I am not 59 1/2 and I don't fall under any of the exceptions. Do I have to pay the penalty on the $13,000? What about the taxes I paid on the earnings?

[mbozek]

Distributions from a Roth IRA are taxable to the extent the distribution exceeds the aggregate contributions to the Roth IRA. 10% premature distribtion tax applies on rollover amounts from regular IRA if a distribution is made within 5 years beginning in the tax year the contribion was made. So if your contribution to the Roth IRA totaled $25,000 in 1998 you can withdraw $13,000 without any income tax because you were taxed on $25,000 beginning 1998. See IRC 408A(d)(1). But you will have to pay a penalty tax of $1300 if you withdraw the funds in 2002 becuse they have deposited less than 5 years.

[Guest Fishchick]

You could wait until 2003 to take the $ out and owe no penalty. You may also be able to claim the loss as a miscellaneous itemized deduction (subject to 2% of AGI max). See Pub 590 (rev 2001) pg. 33 for details of how this works in a Roth.