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 [1] 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 [2] 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 [3] 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 [4] and Making Early Roth IRA Withdrawals [5].
In addition, I funnel most of our Roth money into my account using an old Strategy to Contribute More Than Roth IRA Limit Allows [6].
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 [7] 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.
Warning
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 [8], Individual Retirement Arrangements (IRAs).