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I have two questions regarding taxes and penalties on Roth IRA distributions. After reading IRS publication 590 ( http://www.irs.gov/pub/irs-pdf/p590.pdf ), I have not yet found the answer I'm looking for.

Here's an example. In 2000, Jane contributes $1000 to a Roth IRA. Now in 2002, the value of the assets in the Roth IRA has fallen to $500. For simplicity, assume that over the course of two years, no assets in the account produced any income or gains in the form of dividend payments.

1) If Jane withdraws the $500 and liquidates the Roth IRA, what amount of the distribution, if any, is subject to taxes and/or penalties? If I understand correctly, the $500 does not exceed Jane's original contribution of $1000. However, Pub 590 only discusses that distributions of any amount of contributions made within the same tax year are considered as if no contribution was ever made. But in the above example, the distribution is not made in the same year of the contribution. So is the $500 distribution subject to early withdrawal penalties? My reasoning says no. I also assume that no amount of the distribution is subject to taxes, as there are no earnings in the account. Is this assumption correct?

2) Now, Jane originally contributed $1000, and now only has $500 to show for it after liquidating the Roth IRA. Can this be considered a capital loss? If so, how would it be reported? If not, why is it not considered a capital loss?

Thanks in advance,
Bill
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