Writing Off Roth Losses
Tuesday, July 29, 2008; 12:00 AM
If the current value of my Roth IRA is less than the amount I invested, can I close my account and claim a loss on my taxes?
You may be able to write off the loss in your IRA. The rules are tricky, though, and you probably won't be able to deduct as much as you think.
You can only deduct Roth IRA losses if you close out all of your Roth IRA accounts and if the total amount you receive is less than your basis in the account. For a Roth, your basis is the total amount you've contributed, plus any money converted into a Roth, minus any earlier withdrawals.
To deduct a loss in a traditional IRA, you'd need to close out all of your traditional IRA accounts and receive less than your basis. Your basis in a traditional IRA is your total nondeductible contributions minus any earlier withdrawals; the basis for any tax-deductible contributions is $0.
You can't report the loss the same way that you would deduct a capital loss on money-losing investments in a taxable account. Instead, it is a miscellaneous itemized deduction on Schedule A. You must itemize to take this write-off, and your total miscellaneous itemized deductions -- which also include job-hunting costs, investment expenses and unreimbursed employee business expenses -- are deductible only to the extent that they exceed 2% of your adjusted gross income.
To calculate the write-off, say you contributed $7,000 to your Roth IRAs over the past few years and the accounts are now worth $1,000. If you closed all of your Roths, you'd have a loss of $6,000. If your adjusted gross income was $50,000 for the year, you could close the Roth IRAs and write off $5,000 (your losses above $1,000, which is 2% of your adjusted gross income).
You can't take this deduction if you're hit by the alternative minimum tax, which does not allow miscellaneous itemized deductions. See How Can I Avoid the AMT for more information.
Taking the loss may seem helpful, especially in a year when your investments have lost money. But there's a big downside: Once you close those IRAs, you lose the opportunity for that money to grow tax deferred (or tax-free in a Roth) for retirement. As a result, it usually isn't worthwhile to close all of your IRA accounts unless you have major losses.
If you do, make an extra effort to max out your retirement accounts in the future so you can build your nest egg back up. Maybe even use some of your tax savings from writing off the losses to help boost your future retirement accounts.
For more information, see Everything You Need to Know About IRAs.