IRA Distribution

[Guest Joseph Ssiska]

My IRA has lost considerabily and is below the contribution amount and has no earnings. Can I take a distrabution for the whole IRA? Can I also take a tax break for the amount that I lost?

EXP: Invest $2000 in 1998 and now IRA is worth

$1165 in 2002.

[mbozek]

If you contributed to a deductible IRA why not convert the IRA to a Roth IRA this year. You would only have to include $1165 as taxable income and you could then get the benefit of earnings on Roth being exempt from income tax. By doing a conversion you avoid 10% premature distribution tax if you are under 59 1/2.

[Mary Kay Foss]

A loss is available if you cash out ALL IRAs that you have and the total amount that you receive is less than your basis. The loss is treated as an itemized deduction subject to the 2% limitation -- this is a category that most taxpayers do not get to deduct.

If you're subject to AMT, this loss is not deductible. In other words, you're better off to wait and see if there's a recovery or do a Roth conversion than to try to take the loss.

[Guest Joseph Ssiska]

After viewing the respose postings we have converted from Traditional IRA's to Roth and hope for a recovery. I was also told by my investor that I was subject to a 10% withdrawl penalty if I withdrawl before 59 1/2 years old. Is this true even though I have lost 40% of my intial investment?

[Guest mpedroza]

Any distribution, regardless of loss, from a Traditional IRA or Roth IRA, prior to age 59 1/2 is subject to the premature distribution penalty of 10% (if it is not distributed under the "substantially equal"method and if you keep the money). Since you converted it to a Roth IRA (hopefully your investment advisor made sure your income allowed you to convert to a Roth), your distribution will become taxable income in the year of conversion, however the 10% penalty will not apply. The only other exceptions to the 10% penalty are found under regulation 72 (t). 10% penalty will not apply

[Appleby]

mpedroza,

For his example, there will be NO penalty ( given that only the earnings in a Roth IRA is usually subjected to taxes and penalty-if the distribution is non-qualified) If he takes a total distribution, it will be considered a return of basis and therefore tax and penalty free.

I like Mary Kay Foss solution

Joseph Ssiska, check out the following URLs

http://www.fool.com/taxes/2002/taxes020222.htm

http://www.mpowercafe.com/retirement/featu...4_11202001.html

They address deducting IRA losses