Originally Posted by CABarb
As a result, my AIG went up and I can't contribute to ROTH. (I did stop the automatic payments after I heard about the bonus but some payments were already made into the account). I'd like to withdraw the money and take a loss for 2008 tax return. What form do I use?
I have checked my investment and see that I have lost more than half of my contribution amount but I want to take the money out. Can I take the loss on this year's taxes if I withdraw before 4/15/09? I can't roll it over to another years contribution as I will get another bonus for this year.
Thanks in advance for any advice you can give me.
Unfortunately I have some experience in this area, but at least I have a two-part answer.
First, if you make an ineligible contribution to a Roth IRA, the conventional solution is to call the custodian to have it withdrawn from the Roth and transferred to a conventional IRA. The custodian might do it over the phone but will probably have some sort of form to be filled out, signed, and faxed in.
The custodian uses Pub 590, IRS Notice 2000-39, and IRS Final Regulation 1.408-11 to determine the amount of earnings or losses to be attributed to that recharacterization. (Hey, I'm quoting from Fidelity's letter here. I've never looked at the notice or the final regs and most taxpayers shouldn't have to either. But now you know where to search if you're really curious.) The calculation is based on the IRA's total earnings during the time that the ineligible contribution was in the account. So the amount of the recharacterization will be more or less than the contribution, depending on what kind of year the investment has experienced. For 2008, probably less. You'll get a new 2008 1099-R and a 5498 reflecting these transactions, so if you were planning on filing your 2008 tax return next month then you might as well go get an extension now.
If you want to cash out the amount of the contribution then you'll lose even more than you've already lost-- unless you're able to pull off a 72(t) plan of substantially equal periodic payments over a number of years then you'll pay an additional penalty for an ineligible distribution. And to add insult to all these previous injuries, IRA losses are not tax-deductible in the manner of taxable investment losses. So I don't think that you'd be able to deduct the losses on any year's taxes, let alone this year's taxes.
My advice would be to have your custodian put your 2008 and 2009 IRA contributions into a conventional IRA. (Assuming you're eligible to contribute to a conventional IRA.) When your AGI is lower then you can decide whether or not you want to convert your conventional IRA to a Roth. One consideration is the value of the investment but there are other conversion considerations (http://www.early-retirement.org/foru...not-30664.html
) that make this a complex decision.
I fell into this Roth-eligibility trap by trying to contribute money to a Roth IRA as soon as it had been earned. I've since learned not to make any IRA contribution until January of the following year, when I know exactly where we're eligible to contribute.