When you invest in a retirement plan, you may incur a loss. The market is volatile, and your accounts don't always perform as well as expected. Though most investment losses are deductible on your income tax return, losses on individual retirement arrangements don't always qualify. To deduct a loss incurred on an IRA, you must meet strict requirements published by the Internal Revenue Service.
An IRA is a retirement account that allows you to invest pre-tax dollars. However, the IRS limits the amount of deductible funds you can invest in the account each year. If you invest more than the limit, you have made a nondeductible contribution. At the time of publication, the limit on deductible contributions is $5,000 for those under 50 and $6,000 for those 50 and older.
You cannot claim a deduction for losses on a traditional IRA in any circumstance if the account is still open. If the account is no longer open and you have received all distributions, you may be able to claim a deduction for certain types of losses. However, you can deduct losses only if the total amount of your distributions is less than your basis in the account, which is the amount of nondeductible contributions you have made over the life of the IRA.
To determine the amount of your loss, subtract the total amount of the distribution from your basis in the IRA. For example, if you made $9,000 of nondeductible contributions to the account over the years and your total distribution is only $3,000, you have a loss equal to $6,000. You must itemize your deductions in order to claim the loss. Include the amount as a miscellaneous deduction on Schedule A of Form 1040. Total miscellaneous deductions must exceed 2 percent of your adjusted gross income for you to claim any loss.
The rules for deducting losses on an IRA are the same, regardless of whether the account is a traditional IRA or a Roth IRA. However, while most contributions made to traditional IRAs are deductible, contributions made to Roth IRAs are always nondeductible, which creates a significant basis for the holder of an IRA account. Thus, Roth IRAs are more likely to incur a deductible loss than traditional IRAs.