Tax Deductions for IRA and 401(k) Losses

You must use Form 1040 if you want to write off your retirement plan losses.

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People contribute to individual retirement accounts and 401(k) plans with the expectation that their savings will grow. Unfortunately, retirement plans sometimes lose money and the Internal Revenue Service places a number of restrictions that don't allow taxpayers to claim those losses as deductions. In addition, many IRAs and 401(k)s are funded with money that isn't included in your taxable income. If yours is one of them, you might not be able to claim a deduction at all.

Deduction Prerequisites

Before you can claim a loss from either a 401(k) or an IRA, you must close all accounts of the same type. For example, if you wanted to claim a loss on your Roth IRAs, you must close all of your Roth IRA accounts. However, your traditional IRAs and 401(k) accounts may remain open.

After-Tax Contributions Required

Your basis for your retirement plan isn't the amount you've contributed, it's the amount of after-tax contributions you've made. When you make nondeductible contributions or deferrals that are excluded, you're using money that hasn't been taxed, so the IRS isn't going to let you write off that money when you lose it. As a result, the only way that you can have a loss in a retirement plan is if you're made nondeductible contributions.

Calculating the Loss

The amount of the loss equals your after-tax contributions to the retirement plan minus all of the distributions you've taken out, including the distribution to close the accounts. For example, say you've contributed $30,000 to your Roth IRA and taken distributions of $10,000 and $15,000. Because your distributions are $5,000 less than your after-tax contributions, you have a $5,000 loss. Alternatively, if you had a 401(k) plan and didn't have any after-tax contributions because they were all made with pretax dollars, you wouldn't have a tax-deductible loss even if your plan became totally worthless.

Figuring Your Deduction

IRA and 401(k) losses are an itemized deduction, so you can't claim it unless you give up the standard deduction. It also is categorized as a miscellaneous deduction subject to the 2 percent of adjusted gross income limit, so you can only deduct the portion of the loss that exceeds 2 percent of your AGI. For example, say you have a $5,000 loss and a $20,000 AGI. You could deduct $4,600. If your AGI was $100,000, you would only be able to deduct $3,000.