Deducting Roth IRA Losses

September 13, 2006

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.

Comments

Leave a Reply

Services

Beacon Financial Advisors, LLC, is a fee-only financial planning and Registered Investment Advisory firm headquartered in Lee’s Summit, Missouri and serving the greater Kansas City area.

The firm offers comprehensive financial planning services. Beacon advisors work solely for their clients. Click here to learn more about our services.

About Us

Kristine McKinley, CFP®, CPA, is the founding principal of Beacon Financial Advisors, LLC, an independent, fee-only financial planning firm located in Lee’s Summit, Missouri and serving the greater Kansas City area.

Kristine focuses on providing fee-only financial planning, investment advice, and tax preparation to individuals and families from all income levels.  About Us

In the News

Investment News – Kristine McKinley discusses the 0% Social Security COLA (for 2016) in No Social Security cost-of-living adjustment in 2016.

Kiplinger Magazine/NAPFA – Kristine McKinley answered reader’s tax questions during the 2013 Jump Start Your Retirement Plan Days sponsored by Kiplinger magazine and the NAPFA Consumer Education Foundation.