Emptying a Roth IRA account
I saw an example near the end of this webpage trying to illustrate how to calculate loss in traditional IRA for deduction.
At the beginning of the tax year, Bill has an IRA with a balance of $24,000 (my understanding: deductible + nondeductible contributions). His basis in it is $15,000 (my understanding: nondeductible contribution).
But during the year his IRA investment balance dropped by almost 50% to $13,000.
So the value of his IRA dropped $11,000 (= $24,000 - $13,000)
The $11,000 loss ate up $9,000 (= $24,000 - $15,000 basis) of his tax-deferred earnings (my understanding: deductible contribution), as well as $2,000 into his basis of $15,000. So he could claim a $2,000 loss, after he withdraw all is IRA money.
If I understand correctly, his deductible loss is calculated as his basis minus end-of-year balance, i.e. $15000 - 13000 = 2000.
But his end-of-year balance $13000 consists of the part from the deductible contribution, and the part from the nondeductible contribution.
The part from the deductible contribution should be taxed as ordinary income.
His deductible loss should be the loss for the nondeductible contribution, and has nothing to do with the deductible contribution and its part in the end-of-year balance, i.e. the deductible loss is $11000 * 15000/24000, assuming the proportion between deductible and nondeductible parts in the end-of-year balance is still same as in the original contribution.
Is my understanding wrong?
In another similar example (example 2 on another webpage), it says
(He) would owe no taxes or penalties on this distribution (my understanding: withdrawal), because it's effectively a return of his original investment.
I don't quite understand why there is no tax or penalty. I remember for traditional IRA, withdrawal of deductible contribution and its earnings is subject to ordinary income tax, and if withdraw earlier than a certain age, there will also be penalty, while for Roth IRA, withdrawal of nondeductible contribution can be any time and without penalty.
Thanks and regards!