Writing Off Roth Losses
The rules are tricky, and you probably won't be able to deduct as much as you think.
If the current value of my Roth IRA is less than the amount I invested, can I close my account and claim a loss on my taxes?
You may be able to write off the loss in your IRA. The rules are tricky, though, and you probably won't be able to deduct as much as you think.
You can only deduct Roth IRA losses if you close out all of your Roth IRA accounts and if the total amount you receive is less than your basis in the account. For a Roth, your basis is the total amount you've contributed, plus any money converted into a Roth, minus any earlier withdrawals.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
To deduct a loss in a traditional IRA, you'd need to close out all of your traditional IRA accounts and receive less than your basis. Your basis in a traditional IRA is your total nondeductible contributions minus any earlier withdrawals; the basis for any tax-deductible contributions is $0.
You can't report the loss the same way that you would deduct a capital loss on money-losing investments in a taxable account. Instead, it is a miscellaneous itemized deduction 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.
To calculate the write-off, say you contributed $7,000 to your Roth IRAs over the past few years and the accounts are now worth $1,000. If you closed all of your Roths, you'd have a loss of $6,000. If your adjusted gross income was $50,000 for the year, you could close the Roth IRAs and write off $5,000 (your losses above $1,000, which is 2% of your adjusted gross income).
You can't take this deduction if you're hit by the alternative minimum tax, which does not allow miscellaneous itemized deductions. See How Can I Avoid the AMT for more information.
Taking the loss may seem helpful, especially in a year when your investments have lost money. But there's a big downside: Once you close those 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 all of your IRA accounts unless you have major losses.
If you do, make an extra effort to max out your retirement accounts in the future so you can build your nest egg back up. Maybe even use some of your tax savings from writing off the losses to help boost your future retirement accounts.
For more information, see Everything You Need to Know About IRAs.
As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.
-
Starbucks BOGO and New Sweet and Spicy Drinks
For a limited time, Starbucks is announcing four new "swicy" drinks that are both spicy and sweet.
By Kathryn Pomroy Published
-
Stock Market Today: Dow Slips After Travelers' Earnings Miss
The property and casualty insurer posted a bottom-line miss as catastrophe losses spiked.
By Karee Venema Published
-
A Bunch of IRS Tax Deductions and Credits You Need to Know
Tax Breaks Lowering your taxable income is the key to paying less to the IRS. Several federal tax credits and deductions can help.
By Kelley R. Taylor Last updated
-
Don’t Miss This $2,500 Tax Break for Paying Your Student Loan
Tax Deductions Do you qualify for the student loan interest deduction this year?
By Katelyn Washington Last updated
-
Six Tax Breaks That Get Better With Age
Tax Breaks Depending on your age, several tax credits, deductions, and amounts change — sometimes for the better.
By Kelley R. Taylor Last updated
-
Biden Proposes New Homebuyer Tax Credits
Tax Credits President Biden is calling for new middle-class tax breaks including a mortgage tax credit.
By Kelley R. Taylor Last updated
-
Will Florida Property Tax Be Eliminated?
Property Taxes A new proposal is raising questions about revenue generation in the Sunshine State.
By Kelley R. Taylor Published
-
States That Won't Tax Your EV
State Tax Most states impose additional fees on electric vehicles, but these states don’t penalize EV owners, and some also offer other tax incentives.
By Kelley R. Taylor Last updated
-
Tax Season is Here: Big IRS Tax Changes to Know Before You File
Tax Filing Tax deductions, tax credit amounts, and some tax laws have changed for the 2024 tax filing season.
By Kelley R. Taylor Last updated
-
Your Arizona Family Rebate is Taxable: What to Know
State Tax Thousands of Arizona families will need to report income from special child tax relief payments.
By Kelley R. Taylor Last updated