1. I open a Roth IRA in January 2008 with 00.
2. The account steadily loses money until in October 2008 it has fallen to 00.
3. In October 2008 I close the account (not moving to any other IRA but instead cashing out) at 00, with a loss of 00.
Since I made no gains, but closed with a loss, then there should be no taxes due, correct? (Although the broker may impose a penalty for early withdrawal–but that’s a different question).
{ 2 comments… read them below or add one }
Generally, you’re able to withdraw your original contributions to a ROTH IRA without penalty. So in this case, none of it would be taxable and none of it would be subject to the 10% penalty, since the amount you’re taking out is less than what you put in.
You can read about Roth IRA distributions in IRS Publication 590, starting on page 65. Since the Roth IRA has not been open for 5 years, this is not a "qualified distribution" so it may be subject to income tax and/or penalties.
My quick read, which you should not consider definitive, is that there would be no income tax, since you had a loss, but there would be an early distribution penalty of 10% of the $3,000.
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