ROTH IRA distribution prior to 4 year spread/investment loss/1999 Incl

[Guest]

Individual converts traditional deductible IRA to Roth IRA in 1998 ($10,000). Individual elects 4 year spread of income ($2,500 spread over 1998, 1999, 2000, 2001).

Individual takes 100% distribution from Roth IRA in 1999 ($7,000) after experiencing an investment loss of ($3,000).

Question:

Is the individual's includible income in 1999 from the distribution and conversion equal to:

$7,500 ($2,500 originally spread to 1999 and accelerated $5,000 original spread to 2000 and 2001)

or

Something less considering the investment loss and total distribution of only $7,000?

[Mary Kay Foss]

Form 8606 Part III gets you to the right answer. It's basically the amount received ($7,000) reduced by the 1998 AND 1999 installments of 4-year spread.

If the individual doesn't meet an exception under 72(t) there will be a 10% penalty on the entire $7,000 as well.