Realizing a loss in a stock originally bought in Roth IRA, then removed via "removal of excess" before filing deadline

[taxes4739]

> we have no way of knowing whether the amount you withdrew conforms to the [NIA calculation] above.

The brokerage provides a "Removal-of-Excess Form", with a checkbox to have them calculate the earnings per the NIA formula. I used that. In other words: I didn't manually calculate the NIA, I only told them the amount of excess contribution, and TD Ameritrade calculated the earnings/loss & determined the final value of shares to remove.

[dmertz]

So it sounds like they did do the NIA calculation and then translated the dollar amount into some number of shares (different than the number of shares originally purchased with the excess contribution if there were other amounts in the account over which the NIA was required to be calculated) having a current total value equal to the amount required to be distributed.  That would be fine.  As I said, ignoring transaction costs, if any, that would be equivalent to selling the same number of shares inside the IRA, distributing the exact adjusted amount in cash, and then repurchasing the shares outside the IRA.

However, stock is not usually bought and sold in fractional shares, so to do this with whole shares the return of contribution would have to be accompanied by some amount of regular distribution to account for the additional fractional share needed to make a whole share.  If the in-kind distribution was able to consist of fractional shares such as is possible with a mutual fund, this wouldn't be an issue.

Given all of the complications, I would never suggest that anyone do an in-kind distribution for a return of contribution.  It serves no purpose other than to avoid a round-trip sale and repurchase and to ensure the that transaction is completed timely such that the cost basis of the shares outside the IRA is the same as the distributed value.

[taxes4739]

> stock is not usually bought and sold in fractional shares, so to do this with whole shares the return of contribution would have to be accompanied by some amount of regular distribution to account for the additional fractional share needed to make a whole share. If the in-kind distribution was able to consist of fractional shares such as is possible with a mutual fund, this wouldn't be an issue.

The removal was done with exact fractional shares. It was not a mutual fund, it was an ETF, and they removed fractional shares.

> I would never suggest that anyone do an in-kind distribution for a return of contribution. It serves no purpose other than to avoid a round-trip sale and repurchase and to ensure the that transaction is completed timely such that the cost basis of the shares outside the IRA is the same as the distributed value.

Originally my plan was to just sell shares and remove the cash. However, when I received the Removal of Excess form from TD, and saw that it allows me to list other assets to be removed, I called TD to ask the exact question in the original post: if I remove shares, does it transfer the original cost basis out of the account such that when I sell the shares (now in a taxable account), I use the original cost basis of the shares when they were purchased, and thus can realize the loss. I was told yes, that's how it works. I hung up and called two more times to ask the same question to two more staffmembers to be sure. That was the purpose.

[dmertz]

"The removal was done with exact fractional shares. It was not a mutual fund, it was an ETF, and they removed fractional shares."  That works then.  (Your original post indicated that they were stock shares.)  IRS guidance does provide that the return of contribution can be accomplished by a distribution of assets having a current value equal to the dollar amount required as a result of the NIA calculation.

The only case where original cost basis of an investment in a retirement account is taken into account upon distribution is when a distribution of employer stock shares from an employer-provided retirement plan like a 401(k) qualifies for distribution of Net Unrealized Appreciation as part of a lump-sum distribution under section 402(e)(4) of the tax code (which has nothing to do with IRAs).  Otherwise, cost basis of a particular investment in a retirement account is meaningless.