Did you know that you could deduct losses in your IRA accounts? It’s not as simple as it sounds… but it is available and can be a sort of consolation prize for the poor individual that fits the circumstances.
Deducting Losses on a Traditional IRA
Of course, in order to deduct a loss, you have to have a basis in the account, since by definition a loss results when your balance is less than the basis. The only way to have a basis in a traditional IRA is to have non-deductible contributions, that is, contributions that you made but did not deduct from your income for tax purposes.
If your traditional IRAs have experienced significant losses (with respect to the basis), you have the option to claim the loss as a miscellaneous itemized deduction, subject to a 2% of AGI floor.
For example, if you had IRAs with a basis of $5,000 and your investments had lost value to a point where the account was worth $100, you have a loss of $4,900. For our example we’ll say that you have a household AGI of $75,000. You are eligible to deduct $3,400 as a miscellaneous itemized deduction – your loss is $4,900 and the 2% AGI floor is $1,500, so the difference, the deduction, is $3,400.
In order to do this, your loss must be across all of your IRAs aggregated, and you must close ALL traditional IRA accounts and take distribution of all funds from those accounts. In other words, if you have a loss in one account and a gain in another account, your loss has to be netted with all accounts aggregated in order to take advantage of this deduction.
Deducting Losses on a Roth IRA
The same holds for a Roth IRA – but you always have basis in a Roth, since by definition all contributions or conversions constitute basis in the account. The same rule applies here though: you must close ALL Roth accounts and take distribution of the funds in order to take this deduction, and the loss must be an overall net loss considering all of your Roth accounts in aggregate.
In some cases you might be able to isolate a loss in your IRAs via conversions, rollovers or recharacterizations. In general, this deduction is a last-ditch effort for situations where things have really gone south in your accounts. As mentioned before, it’s pretty hairy to work out the details, but it can be a “consolation prize” if you’ve found yourself in this position.
Photo by Lida Rose
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I can learn from you, you can learn from me - please leave your comments and links!Jim Blankenship, CFP®, EA, is an expert in personal retirement, IRAs, and tax issues, with more than 25 years of experience in the industry. Read more from this author
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Be warned that the losses claimed as miscellaneous itemized deductions on Schedule A are add-back items when calculating the Alternative Minimum Tax.
Very good point, Bill – too often AMT calculations are overlooked, but for lots of folks the AMT can be a (shockingly) very important matter indeed.
jb