Do I Have to Pay Tax on an IRA That Did Not Make Any Money?

You pay ordinary income tax on IRA withdrawals.

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Individual retirement accounts are afforded special tax treatment by the Internal Revenue Service. Your IRA contributions grow on a tax-deferred basis, meaning you can grow your retirement nest egg faster than if you invested the same cash in a taxable account. As with any investment, an IRA can lose money. However, when your retirement fund shrinks, your tax bill does not necessarily follow suit.

Individual Retirement Accounts

You can make contributions to your IRA on a pre-tax basis. However, rather than avoiding income tax altogether, you just delay paying income tax until you make withdrawals from the account. At that time, your withdrawals of both principal and earnings are subject to both state and federal income tax. If your account drops in value, then from a tax perspective, it is as if that money never existed in the first place. You simply pay income tax on the money that you withdraw from the account.


IRA withdrawals are subject to age restrictions and you have to pay a 10 percent federal tax penalty if you access your funds before reaching the age of 59 1/2. You pay this penalty in addition to ordinary income tax. The IRS waives the penalty fee in some situations — such as if you use the cash to cover certain non-reimbursed medical expenses. If you do not qualify for a penalty waiver, then a premature withdrawal penalty could exacerbate the losses you realize when your IRA drops in value.

Non-Deductible IRA

Deductible IRA contributions are subject to income restrictions if you or your spouse has access to an employer sponsored retirement account, such as a 401(k). If your adjusted gross income exceeds the annual limits, you can still contribute to an IRA, but only on an after-tax basis. Your non-deductible contribution forms your cost basis for future taxation. When you eventually make withdrawals, you only pay taxes and any applicable penalties on the difference between your cost basis and the withdrawal amount. If your account's closing value amounts to less than your original cost basis, then no taxes are due since those funds have already been taxed.


The responsibility to keep track of non-deductible falls on you, rather than the account custodian. You have to file a 8606 tax form when you make a non-deductible contribution. If your 401(k) contains after-tax contributions, then you need to carefully keep track of your cost basis on that money if you roll it into an IRA. If you cannot prove that you made non-deductible contributions, then the IRS assumes all your IRA funds are fully taxable. If you lose money and lose track of your cost basis on a non-deductible IRA then you will have to pay income taxes twice on the same money.