Can I Deduct a Loss in My IRA?
The quick answer is, YES if you have a ROTH IRA and NO if you have a Traditional IRA (there is an exception that applies to non-deductible contributions).
When it comes to deducting losses in IRA accounts, the key is understanding the concept of basis. You must have a tax basis to deduct a loss. So, how do you know if you have a tax basis in your IRA account? Read on.
Contributions to your ROTH are AFTER-TAX contributions. Since your contributions have already been taxed, the balance in the account represents your basis in the account.
In the future, if you close your ROTH account and your withdrawal is LESS than your BASIS in the account, you have a loss.
For example, if your ROTH account balance on December 31, 2015 is $10,000, and the account balance on December 31, 2016 is $6,000, and you close the account on January 2, 2016 and withdraw the entire $6,000, you would have a $4,000 loss.
Now the question is, how do I deduct my loss? Follow the rules.
Rules for Deducting a Loss in a ROTH IRA Account:
- If you have one or more ROTH IRA accounts, you must close ALL the accounts, even if one or more of them has a profit.
- All the funds in all your ROTH accounts must be distributed to you. In other words, you must actually receive the funds; you cannot deduct a paper loss. If you happen to have a traditional IRA in addition to your ROTH IRA, you only have to close the ROTH IRA and NOT the traditional IRA. The traditional IRA is treated separately.
- You must itemize your deductions on Schedule A.
- You deduct the loss on Schedule A as a Miscellaneous Deduction and subtract 2% of your adjusted gross income (AGI) from the loss. The remaining amount is your deduction.
- Your AGI is $50,000.
- The loss in your ROTH account is $4,000.
- You subtract $1,000 (2% x $50,000) from the $4,000 loss
- You claim a Miscellaneous Deduction of $3,000 on Schedule A
Contributions to traditional IRAs are generally PRE-TAX contributions, and therefore, no tax basis exists in the account. This means All withdrawals are subject to taxes, regardless of the amount of value lost in the account.
There is an exception. If you made non-deductible contributions to your traditional IRA, you would have basis in your traditional IRA account. Basis would be the sum of all non-deductible contributions in the account. But in reality, most people don't make non-deductible contributions to their traditional IRAs.