One of the major differences between a traditional individual retirement account and a Roth IRA is how contributions are taxed. Contributions to a traditional IRA are made with pre-tax dollars, which means you get to take a tax deduction for them when you file your federal income tax return. Roth contributions must be made with after-tax dollars, so you can't take a tax deduction for those.
Roth IRA Benefits
While you don't get a tax deduction for contributions to your Roth IRA, there are other significant benefits to a Roth account. All of the investments in your account grow tax-free, and qualified withdrawals of your earnings are also free from federal income taxes. Because you've already paid taxes on your contributions, you can withdraw them at any time without paying taxes or penalties.
The Internal Revenue Service has few limits on the types of investments you can put into your Roth IRA. Some investments involve a higher risk than others, and it is possible to lose money on them. If you have an overall loss in your Roth IRA, you may be able to deduct part of the loss after you have liquidated your Roth account, if you itemize your deductions. You can include this loss with your other miscellaneous deductions, but this is limited by the IRS's "2 percent" rule, which means you can only deduct the amount that exceeds 2 percent of your adjusted gross income.
Alternative Minimum Tax
The only way you can deduct Roth IRA losses is to claim them as a miscellaneous itemized deduction. Miscellaneous expenses are not deductible for alternative minimum tax purposes. Because you can't claim miscellaneous expenses, you can't deduction losses in your Roth IRA if you are subject to the AMT.
Savers Tax Credit
The IRS offers a tax credit to certain low-income taxpayers who contribute to a qualified retirement account, including a traditional or Roth IRA. The credit can be as much as 50 percent of the first $2,000 contributed, based on income and filing status, as of 2012. For example, you are eligible for a 50 percent tax credit if you are single and have income of $17,000 or less, or if you are married and filing a joint return with income of $34,000 or less.
- TurboTax: Are Losses on a Roth IRA Tax Deductible?
- Good Financial Cents: Are Roth IRA Contributions Tax Deductible?
- IRS: Publication 590: Recognizing Losses on Investments
- USAA: Tax Benefits: Traditional vs. Roth IRAs
- National Association for Family Child Care: IRA Tax Credit for Retirement Contributions
- IRS: Get Credit for Your Retirement Savings Contributions
- IRS: Roth IRAs
- TurboTax: Alternative Minimum Tax: Common Questions