Deducting Roth IRA Losses

Recently, someone asked me if they could deduct losses they incurred in their Roth IRA.  Here’s my response…

You can deduct losses in a Roth IRA, but the rules and treatment are different than you might expect.  First, in order to claim a loss in any IRA investment, you must withdraw the entire balance from all of your IRAs of the same type.  So, if you have a loss in your Roth IRA, you must liquidate all of your Roth IRAs in order to deduct the loss on your tax return.

Second, your basis in your Roth IRA includes your contributions plus conversions (from a traditional IRA) less any withdrawals you have previously taken from your Roth.  Form 8606, Non-Deductible IRAs, is used to determine the basis in your account and to

report withdrawals.  Note that reinvested dividends and capital gains are not part of your basis in a Roth IRA.

Finally, losses in a Roth IRA are deducted on Schedule A – Itemized Deductions, rather than on Schedule D – Capital Gains and Losses, which is where most people would expect to report the loss.  Roth IRA losses are a miscellaneous deduction, subject to a 2% floor.  This means that the deduction is only available if you itemize your deductions, and only the amount greater than 2% of your adjusted gross income (AGI) is deductible.  In addition, miscellaneous deductions are not allowed for purposes of the alternative minimum tax (AMT), so you could lose the benefit of the deduction if you are subject to AMT taxes.

Whether it makes sense to liquidate your Roth IRA to claim the loss will depend on several factors, such as whether you itemize or not, how large the loss is compared to 2% of your AGI, whether you’re subject to AMT tax, and other factors.  You should also consider how much will you lose in potential earnings if you liquidate your Roth IRA.  You may want to consult with your tax advisor and financial planner to determine the best decision for you at this time.

401K Options

Whether you’re switching jobs or retiring completely, chances are you have a 401K or other company sponsored retirement plan that you’ll need to make a decision about.

There are several options on how to handle your 401(k) money when you leave a job:

• Take the Money and run
• Leave the money in the 401(k) plan
• Transfer the funds directly to your new employer’s retirement plan
• Transfer the funds directly to an IRA account (direct rollover)
• Have the check made out to you, and then deposit the funds into an IRA account (indirect rollover)

To read the full article, click here.

Backdoor into Roth

You may have heard that the new tax law eliminates the $100,000 income limit for Roth conversions beginning in 2010.  If you haven’t been able to contribute to a Roth IRA because your income is too high, you now have a back door into the Roth IRA. 

You should start planning now to take full advantage of the new tax law.  How?  Contribute the maximum to a non-deductible IRA now (and every year up to 2010).  The limit in 2006 is $4,000 ($5,000 if you are 50 or older). 

In 2010, when the income limit for Roth conversions goes away, you can convert your traditional IRAs to Roth IRAs.  Because you made non-deductible contributions, only your earnings will be subject to income tax. 

Even better, taxes owed on conversions made in 2010 don’t have to be paid until 2011 and 2012, which allows you to spread the tax burden over several years.

What are the benefits of this strategy?  Tax free income in retirement, no Required Minimum Distributions at age 70 1/2, and tax free income for your heirs. 

Need help determining if this is the right strategy for you?  Check out or Tax Review.

Don’t Let Taxes Ruin Your Retirement

You know that you should diversify your investments to reduce your investment risk, but did you know you should also diversify your investments for tax purposes?

401K and IRA accounts are taxed at your ordinary income tax rate, so if you’re in the 25% tax bracket when you retire, you’ll pay 25% (plus state income taxes) on every dollar you withdraw from your retirement accounts.

This can really put a dent in your budget, especially in your later retirement years.  To avoid paying taxes on every dollar of income during retirement, why not start investing in Roth IRAs and taxable accounts now, instead of socking all of your money away in tax-deferred retirement accounts?

That way, when you are retired, you can decide which account to pull money out of first to keep your income taxes at a minimum and to make the most out of every retirement dollar.

Resources for furthur discussion on diversifying for tax purposes:

Ask the Expert ~ Taxing Withdrawals
Cut Your Taxes In Retirement - CNNMoney.com

How Much Do You Need to Retire?

How much do you need to retire?  The answer is, it depends…

How much do you wish to spend during retirement?  What will you do?  Will you travel?  Play golf every day?  Where will you live?  Florida?  Small college town?

How much you spend during retirement is probably the most important consideration when you’re determining how much you’ll need to save for retirement.

Example:  I have two clients, Client A and Client B.  Client A has saved $1,000,000 for retirement and expects to spend $75,000 per year, which includes traveling, playing golf and living in a state with a modest cost of living.

Client B has only saved $500,000 for retirement, but he lives in a small town with a low cost of living and only expects to spend $40,000 each year during retirement (no golf, little travel, but some frills, such as taking family out to eat often).  Both Client A and Client B can expect to receive the same amount of Social Security benefits.

Who do you think will fare better during retirement, Client A or Client B?  Check back soon for the answer…