Excess ROTH contribution withdrawn with a loss

[linduca1216]

Removing ROTH contributions - both erroneously made in 2021 for tax years 2019 and 2020.  They are the only contributions in the account.  Account is in a loss situation.   How to report the loss, etc?

[qbteachmt]

You are handling Corrective Distribution, not Loss reporting.

I like web articles meant for the investor, such as:

https://www.fool.com/retirement/plans/roth-ira/excess-contribution/

https://www.taxact.com/support/1280/2016/ira-or-roth-ira-excess-contributions

https://www.investopedia.com/articles/retirement/04/042804.asp

https://www08.wellsfargomedia.com/assets/pdf/personal/goals-retirement/taxes-and-retirement-planning...

And of course, the IRS:

https://www.irs.gov/publications/p590a

[linduca1216]

"You can take into account any loss on the contribution while it was in the IRA when calculating the amount that must be withdrawn. If there was a loss, the net income you must withdraw may be a negative amount."

Am wondering how/where to enter amounts when this is the case.

[linduca1216]

Just looked at the WellsFargo article - it specifically gives an example of there being less in the account than the original contrib... SInce gain would be recognized, thought a loss would be also.

[qbteachmt]

If I put in $6k and wasn't eligible or that is excess as duplicate or whatever reason, and in the meantime it is down to $5k, I take out $5k. There is no reporting of the loss for these protected accounts. It is no different than spending that money outside of retirement, since it was not an allowed or protected activity in the first place (not eligible).

[Yofanny19]

My situation is somewhat similar but different.  I contributed $6000 to my Roth IRA in 2022 but then my AGI went over the limit so I looked into removing the $6000 plus any earnings.  But The value of My Roth IRA dropped 10k from 1/1/2022 until now.  From what I read, if there’s a loss you can deduct it from $6000 but what if that leaves me with a negative number (-$4000)?  Do I do nothing?  If the value of the account later increases and I’m in the positive am I then penalized?

[qbteachmt]

@Yofanny19 

The IRS has the method for how to attribute the gain or loss to a specific contribution amount. Read this article:

https://www.investopedia.com/net-income-attributable-definition-5223368

"the value of the account later increases and I’m in the positive am I then penalized?"

That's not what is going on for your taxpayer. The disallowed amount has gain or loss, just like any investment. A disallowed amount that has gain means there is taxable income. A disallowed amount that has loss, means there is no income to tax. But the process that is disallowed means there will be penalty, because it was the wrong thing to do. If it is for 2022, the corrective action can be taken by April 18, or the due date of the extended return, and it's as if the error never happened = no penalty for the disallowed contribution.

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Thanks.