Deducting IRA Losses

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.

About the author

Jim Blankenship, CFP®, EA

Jim Blankenship is the founder and principal of Blankenship Financial Planning, Ltd., a financial planning firm providing hourly, as-needed financial planning and advice. A financial services professional for over 25 years, Jim is a CFP professional and has earned the Enrolled Agent designation, a designation that qualifies him as enrolled to practice before the IRS. Jim is also a NAPFA-registered financial advisor, which designates him as a Fee-Only Financial Advisor.

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2 Comments

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  • Hi, Jeff –

    If the client has distributed all of his trad IRA accounts in the tax year then the loss (versus the basis) should be deductible as a miscellaneous itemized deduction. It shouldn’t matter (as far as I know) that the distribution resulted in a Roth conversion, since it’s still a distribution.

    He *may* have to pay all of the tax on the 2010 return (instead of spreading it) since he’s recognizing the loss in 2010… you should follow up on that possibility. If it was me doing the return I’d recommend going that route to be conservative.

    jb

  • I have a client who had a significant loss in tIRA’s with basis. He did a conversion of all those IRA’s to Roth IRA’s. Does the conversion allow him to take a deduction for the losses or does he have to actually take distribution of the monies?

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