We all hope that our investments will produce profitable returns. And while you can get guaranteed results on some investments such as
certificate of deposits and
money market funds, these investments usually render a lower potential return than high-risk investments. As such, you might prefer some riskier investments, but the opportunity for greater returns comes with the higher potential for losses. In regular accounts in which taxes are not deferred, losses on investments can be included on your tax return. (see
Selling Losing Securities for a Tax Advantage) However, losses on investments in IRAs can be claimed only if certain requirements are met.
Withdrawing Balances to Claim Losses In order to claim a loss on IRA investments, you must withdraw the entire balance from all your IRAs of the same type. For instance, if the loss occurred in a
Traditional,
SEP or
SIMPLE IRA, you must withdraw the balances from
all your Traditional, SEP and SIMPLE IRAs (hereinafter collectively referred to as Traditional IRAs). If the loss occurred in a Roth IRA, you must withdraw balances from all your Roth IRAs in order to include the loss on your tax return
Traditional IRA Losses You may deduct your Traditional IRA losses only if the total balance that you withdraw is less than the after-tax amounts (
basis amounts) in your Traditional IRAs. Your IRA basis is attributed to non-deductible contributions and
rollovers of after-tax amounts from
qualified plans,
403(b) accounts and
457(b) plans. You must file IRS Form 8606 to determine the basis of the amounts you withdraw from your Traditional IRAs. Form 8606 serves also to indicate to the IRS which portion of your withdrawal is attributed to after-tax amounts and the amount that is eligible to be claimed as a loss on your tax return. Form 8606 and its accompanying instructions are available at
www.irs.gov.
Example 1
At the beginning of 2011, Tim’s aggregate Traditional IRA balance is $20,000, of which $15,000 is attributed to after-tax amounts. By December 31, 2011, the investments in Tim’s Traditional IRAs lost $8,000, leaving his balance at $12,000. This amount is less than the basis amount of $15,000, so Tim may be eligible to claim a loss if he withdraws his total Traditional IRA balance. His deduction would be the difference between the balance he withdraws ($12,000) and his basis. Here is how the deduction is determined:
$20,000 (January 5 Traditional IRA balance) - $8,000 (Losses over the year ) = $12,000 (December 31 Traditional IRA balance)
$15,000 (Basis amount) - $12,000 (Balance on December 31) = $3,000 (Deduction for Traditional IRA losses) |
Roth IRA Losses The same rules apply to the Roth IRAs: claiming Roth IRA losses on your tax return is allowed only if the total of your Roth IRA balances are withdrawn and the amount withdrawn is less than the basis in your Roth IRAs.
Example 2
At the beginning of 2011, Tim’s Roth IRA balances are $10,000, $6,000 of which is attributed to earnings and $4,000 is attributed to contributions. Since Roth IRA contributions are non-deductible, all contributions are considered after-tax amounts (basis amounts). During 2011, Tim’s Roth IRA investments lost $2,000, leaving his balance at $8,000. This amount is more than the basis amount of $4,000; if Tim withdraws his entire Roth IRA balance, he will not be able to include the losses on his tax return:
$10,000 (January 5 Roth IRA balance) - $2,000 (Losses) = $8,000 (December 31 balance)
$4,000 (Basis amount) - $8,000 (December 31 balance) = $4,000 |
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