Unlike other investments that generate taxable gains and deductible losses each year, you can't deduct losses in qualified retirement plans -- such as individual retirement accounts, 401(k)s and 403(b)s -- while the plans are still open. In many cases, you won't be able to deduct losses at all. However, if you've made nondeductible contributions, you might qualify for a deduction when you close your account.
Figuring Your Basis
Before you start thinking that you have a loss in your retirement fund, you need to know your basis in the account. Your basis is only the amount of nondeductible contributions you've made to the account. So, for tax-deferred accounts such as traditional IRAs, 401(k)s and 403(b)s, if you haven't made any nondeductible contributions, you won't ever have a loss -- at least for tax purposes. On the flip side, all your contributions to Roth plans are nondeductible, so your basis equals the total of your contributions.
Calculating Your Loss
The amount of your loss equals the amount of all your nondeductible contributions made to the account minus all the distributions you've received from the account. For example, say you've put a total of $50,000 of nondeductible contributions into your Roth IRA. Suppose you took out $20,000 two years ago and closed the account this year by withdrawing the last $17,000. Since your total nondeductible contributions exceed all your distributions by $13,000, you have a $13,000 loss.
Before you can take a deduction for your loss, you must close all of the retirement accounts of the same type. Say your Roth IRA hasn't been doing so well. If you want to take a tax deduction, you must close all Roth IRA accounts and offset any losses in one account with gains in the others. Retirement accounts of different types can stay open. If you had a traditional IRA and a Roth IRA and were only taking a loss on the Roth IRA, you would not have to close your traditional IRA.
The deduction for losses is a miscellaneous itemized deduction to which the AGI threshold applies, which means that you can deduct only the portion of your loss that exceeds 2 percent of your adjusted gross income. Suppose you have a $13,000 loss and your AGI is $70,000 for the year. Subtracting $1,400 -- 2 percent of your AGI -- from your $13,000 loss gives you a deduction of $11,600.
- Internal Revenue Service: Publication 590 -- Individual Retirement Arrangements (IRAs)
- Internal Revenue Service: Publication 575 -- Pension and Annuity Income
- Bankrate.com: Can Retirement Account Losses Be Deducted?
- Bankrate.com: Deducting Losses in a Roth IRA
- Internal Revenue Service: Like Share Print Retirement Plans FAQs regarding IRAs
- CNN Money: Can I Deduct 401(k) Losses?
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