How to withdraw regular contributions from a Roth IRA that also contains some Roth Conversion contributions?

[Aquarius5]

I have a Roth IRA containing a mix of regular contributions as well as Roth conversion contributions. As I understand, I can withdraw my regular contributions tax/penalty free. However, how I do know how much I can withdraw when the account has a mix of regular contributions and Roth Conversion contributions, each of which may have a confusing mix of gains or losses?

No specific reason, I was just curious how one would facilitate this since Roth IRAs can contain both regular after-tax contributions and Roth conversions.

Let's say For example:

In 2018 you do regular contributions of $1000 to a Roth IRA and invest in a bunch of securities 

In 2019 you do a $1000 Roth Conversion and invest it in a bunch of securities 

In 2020 you sell all the securities and invest in different ones several times, blurring the lines further.

Now it's 2021 and the account value is $2500, implying the overall value of the account has a gain of $500, but it's impossible to differentiate what proportion of this gain/loss is from the roth conversion money or the regular contribution money.  If you want to withdraw the $1000 of regular contributions which should be tax-free/penalty-free, there is no way of knowing or proving that the regular contributions did not have a loss and therefore you are actually withdrawing from some of he roth conversion.

[DanaB27]

Generally, you should keep track of your regular contribution and conversions separately. 

Simply explained, when you take a distribution you first will take from your regular contributions, then from your conversions and then from your earnings last.

Also, there can be a 10% early withdrawal penalty on conversion if the are withdrawn before 5 years are up. Therefore, it is important to keep track of the taxable and nontaxable conversions within the last 5 years. Please see Distributions of conversion and certain rollover contributions within 5-year period for additional information.

In your example, you could withdraw the $1,000 tax- and penalty-free since regular contributions are distributed first.

[Aquarius5]

The problem is when all contributions are lumped into a single account actively buying and selling assets, "keeping track" of which assets are contributions vs conversions becomes impossible and difficult to justify.

Here is a better example:

In 2018 you do regular contributions of $1000 to a Roth IRA and actively trade securities with this money.

In 2019 you add $1000 via a Roth Conversion and continue actively trading securities with this money.

In 2020, let's say the overall account has decreased to now $1500. 

If I withdraw my $1000 of regular contributions now, do I have some way to prove (??) that the $500 losses all came from the roth conversion money?

[DanaB27]

You do not keep track of what is actually happening inside the account. You just record in TurboTax (or on paper or computer, it is best to have more than one location) that you had a net contribution of $1,000 (before taking any distributions) and you enter your conversion on the next screens (TurboTax will ask for taxable and nontaxable conversions within the last 5 years). Let's say that it was nontaxable conversion of $1,000 to keep it simple.

Then the $1,000 distribution in 2021 will still be tax- and penalty free. TurboTax will record that you now have $0 net contributions and still $1,000 nontaxable conversion from 2018. 

@Aquarius5

[Aquarius5]

So, one could hypothetically contribute $1000 of regular contributions, invest it all in a stock that goes to $0, then subsequently do a $1000 roth conversion and immediately withdraw that $1000 tax-free/penalty. That doesn't sound right, is it?

This would mean roth conversions would be a loophole to bail you out of taking a loss on a regular contribution.

[FangxiaL]

In a Roth IRA account, contributions come out first, then conversions, and the last will be the earnings.

Every conversion has its own five-year rule. I remember counting my own five-year holding period. I converted a regular IRA into Roth IRA at end of 2015, I was waiting for 2019 to come to an end so that I can take the money out without any penalty. But till this day, it is still there more than doubled in value. 

It is different for contributions. If you set up the Roth IRA account more than 5 years ago, a contribution you made yesterday can come out without penalty tomorrow.

@Aquarius5