We all know that you can’t take a loss on an IRA…. or can you? I’ve been investigating the possibility of closing out Scott’s Roth IRA and taking the loss.
How IRA Loss Deductions Work
You can deduct a traditional or Roth IRA loss as a miscellaneous itemized deduction. However, there are some conditions that you must meet:
- The deduction is subject to the 2% of AGI limit.
- You can only take the deduction if you close your IRA completely, including all your IRAs at various brokers.
How To Calculate The Loss
The loss is equal to the “total distributions less your unrecovered basis.” Here’s how to calculate the loss and the deductible amount.
- Pull out the document we created back in How to Track Your Roth IRA Contributions and calculate your basis.
- Determine the current value of your IRA plus any distributions you have already taken.
- Calculate (2) minus (1). This is your loss if you sold today.
- Calculate 2% of your AGI, and subtract it from your loss. This is the deduction you can take.
- If you are close to the 2%, review other miscellaneous deductions you could add together, see Publication 529 for a list.
- Sell. (For a Roth, there would be no tax liability, since there are no earnings.)
Why I’m Considering It
Normally, there wouldn’t be any chance that I would even consider this. However, based on some unusual activity in our Roth accounts this year and the current market conditions, I might be able to.
I’ve been draining Scott’s Roth IRA for our Unconventional Roth IRA Strategy to Lower Tax Bill and Making Early Roth IRA Withdrawals.
In addition, I funnel most of our Roth money into my account using an old Strategy to Contribute More Than Roth IRA Limit Allows.
All of this allowed us to have most of our Roth IRA money in my name instead of Scott’s. Don’t worry, since he works at a University, he can Double-dip on Retirement which gives him much more in traditional tax deferred plans.
Although, since we live in a community property state, none of it really matters whose name the money is in, since we share everything 50/50.
I don’t recommend closing your IRA to take a loss! It’s an idea that I’ve been tossing around based on all the other actions that we’ve been taking with our Roth IRA, which is a unique situation. If you have a substantial loss and you understand all of the future tax consequences, the deduction might be something to consider… but proceed with caution!
For more information, see Publication 590, Individual Retirement Arrangements (IRAs).
It’s funny that you mention ownership – my husband and I also distribute our retirement contributions unequally, depending on our income for the year.
I aim to contribute as much as possible to my SEP-IRA each month, and then top off his Roth with our budgeted retirement “leftovers.” It’s really worked out to our advantage, because we minimize my taxable business income and lower our joint tax liability.
It always pays to step back and calculate the “best” way to save for retirement, in your specific situation. 🙂 Don’t assume that a 50/50 split is always the best option.
I’m never going to touch my IRA unless it is an extreme emergency. I know these are vital times right now in the economy, but if you don’t need the money, then I would just leave it alone.
@ Stacey: Isn’t it amazing how well it works when you think of your retirement plan options as a unit instead of his and hers?
@ Donny: Don’t worry, we won’t be spending the money! If I do this, I’ll take the proceeds and the money from the deduction and put them into another retirement plan.
So the only real question is can you recontribute to a new Roth IRA starting in Jan of 2009?
If so, I think a lot of young professionals that are $2k+ underwater on their Roth IRAs could really take advantage of that. Cash out Dec 31st, get the loss on the 2008 taxes. Reinvest on Jan 1st in a new Roth with a slightly different fund-portfolio.
Ultimately you have no real risk that you’ll miss the market and you’ll get a huge tax benefit. Seems too good to be true, but I don’t see anything showing you can’t work it just like that.
Does anyone have the answer for what Otis mentioned? I really want to sell my Roth IRA but want to make sure I can contribute for 2009 if I take the loss on paper. Answers?
@ Otis & Stefan Rice:
I’ve been reviewing the publications and I can’t find anything that says you can’t make a contribution to a new account in the following tax year.
As long as you designate the contributions for 2009, not 2008, I think you would be eligible.