Global Tax Insights
Are Losses on a Roth IRA Tax-Deductible?August 14, 2017
If your Roth IRA is suffering a loss due to poorly performing investments, there is a way you can write off the loss, but it involves careful planning.
Unfortunately, if you have badly performing investments inside your Roth IRA, you can’t deduct the loss, but if you close the Roth account, you might be able to have Uncle Sam shoulder the loss.
First things first—what’s a Roth IRA?
A Roth IRA is a special individual retirement account that you fund with post-tax dollars (you are not permitted to deduct your contributions to the account from your income taxes). After five years, earnings on the account and withdrawals after age 59½ are income tax-free.
Contrary to a Roth IRA, a traditional IRA is a tax-deferred retirement savings account. In a traditional IRA, you pay income tax on your withdrawals.
Is there a way to write off Roth IRA losses on your 1040?
Let’s say that you have contributed $5,000 to your Roth account, and your account balance is currently at $4,000. You’ve taken a 20% loss. When your investments in a Roth IRA decrease like this, you’ll want to find a way to write off these losses, of course. The IRS does not allow you to deduct losses from your Roth IRA on a year to year basis, so you have to close your Roth IRA account in order to deduct your losses.
How do you close the account?
If your total account balance is less than the amounts you deposited as contributions, you can close the account without negative consequences. To close, you must withdraw the complete balance from the Roth account, and you must be at least 59 ½ in order to make withdrawals penalty-free.
Do you need to close your traditional IRA too?
No, traditional IRAs are completely separate from Roth accounts. The value of your Roth IRA from the prior year or at any point during the time the account was open does not matter either.
What is the value of the deduction?
The deduction is the amount by which your tax basis (total amount of Roth IRA contributions) exceeds your total withdrawals from your Roth IRA. For example, let’s say you have contributed $24,000 to your Roth IRA to date, but receive $12,000 when you close the account. This means you have a net loss of $12,000, and thus a deduction of $12,000.
How do you report this deduction?
Once you have closed the account, you must itemize the deduction on your tax return. Be sure that the total amount of your itemized deductions is greater than your standard deduction.
The deduction must be reported on Schedule A of your 1040 as a miscellaneous itemized deduction. The loss must be more than 2% of your adjusted gross income to receive a tax bracket.
Questions? Contact our Tax Services Team.