Last Call for Deducting Roth IRA Losses?

A provision tucked into the Senate tax overhaul bill would kill a little-used but potentially valuable write-off. If you’re sitting on a loss in your Roth IRA, you may want to close the account quickly so you can share the pain with Uncle Sam.

(Image credit: Jason York)

In a perfect world, all your retirement investments increase steadily as you move toward the day you start tapping your nest egg to cover expenses in your post-paycheck life. But sometimes, investments go kaput.

If you sell a loser in a taxable account, at least you can use the loss to offset profits on other investments and deduct up to $3,000 a year in excess loss against other kinds of income. But if the loss occurs in a Roth IRA, it’s tough to get any help from the IRS.

Tough, but not impossible. However, if a change included in the Senate tax overhaul bill becomes law, the miscellaneous itemized deduction for IRA losses discussed below will be eliminated as of the end of 2017.

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First, the current rules:

You can only deduct Roth IRA losses if you close all of your Roth accounts and if the total amount you receive is less than your basis in the account. Your basis is the total amount you've contributed, plus any money converted to a Roth, minus any earlier withdrawals.

Unlike a capital loss suffered in a taxable account that’s reported on Schedule D of the tax return, a loss in a Roth tax shelter is a miscellaneous itemized deduction reported on Schedule A. You must itemize to take this write-off, and your total miscellaneous itemized deductions -- which also include job-hunting costs, investment expenses and unreimbursed employee business expenses -- are deductible only to the extent that they exceed 2% of your adjusted gross income. If your AGI is $100,000, for example, the first $2,000 of miscellaneous deductions don’t count.

The Senate plan would eliminate all itemized deductions subject to the 2% floor. The House tax legislation does not specifically target the IRA loss deduction, but it could be included in the final bill.

If the balance in your Roth IRAs has fallen below your basis, you may have to act quickly to write off the loss.

A couple of caveats:

You can't take this deduction if you're hit by the alternative minimum tax, which does not allow miscellaneous itemized deductions.

And, once you close your Roth IRAs, you lose the opportunity for that money to grow tax deferred (or tax-free in a Roth) for retirement. As a result, it usually isn't worthwhile to close your IRA accounts unless you have suffered a significant loss.

Kevin McCormally
Chief Content Officer, Kiplinger Washington Editors
McCormally retired in 2018 after more than 40 years at Kiplinger. He joined Kiplinger in 1977 as a reporter specializing in taxes, retirement, credit and other personal finance issues. He is the author and editor of many books, helped develop and improve popular tax-preparation software programs, and has written and appeared in several educational videos. In 2005, he was named Editorial Director of The Kiplinger Washington Editors, responsible for overseeing all of our publications and Web site. At the time, Editor in Chief Knight Kiplinger called McCormally "the watchdog of editorial quality, integrity and fairness in all that we do." In 2015, Kevin was named Chief Content Officer and Senior Vice President.