When the value of your investments in a Roth IRA (Roth Individual Retirement Account) decreases, you might wonder if there is a way to write off those losses on your federal income tax return. Find out what tax deductions you can and can't take when it comes to your Roth IRA.
The article below is accurate for your 2017 taxes, the one that you file this year by the April 2018 deadline, including a few retroactive changes due to the passing of tax reform. Some tax information below will change next year for your 2018 taxes, but won’t impact you this year. Learn more about tax reform here.
Having made it a point to carefully grow your retirement fund, when the value of your investments in a Roth IRA (Roth Individual Retirement Account) decreases, you might wonder if there’s a way to write off those losses on your federal income tax return. The Internal Revenue Service does not permit you to deduct losses from your Roth IRA on a year-to-year basis, so the only way to deduct your losses is to close your Roth IRA accounts.
Qualifying for a tax deduction
Only in very rare situations can you deduct losses in your Roth IRA account. To qualify for the deduction, you must close all of your Roth IRA accounts, including Roth IRA accounts that have profits.
Your traditional IRAs need not be closed, as they are treated separately, and the value of your Roth IRA from the previous year or at any point during the time the account was open does not matter. You must show a loss from your tax basis in the account.
Figuring your tax deduction
Your deduction is equal to the amount by which your tax basis exceeds your total withdrawals from your Roth IRAs. Your tax basis is the total amount of your contributions to the Roth IRA because these contributions are made with after-tax dollars.
For example, if over the years you have contributed $25,000 to your Roth IRA but receive $15,000 when you close the account, you would have a net loss of $10,000.
Reporting your deduction
The deduction for Roth IRA losses is an itemized deduction, which means you must itemize on your tax return and cannot claim the standard deduction. If you are already itemizing, this is not significant. However, if you were not planning to itemize, make sure that the total amount of your itemized deductions is greater than your standard deduction.
To claim the deduction, you must file your taxes using Form 1040 and report the deduction on Schedule A. Report the amount of your Roth IRA loss as a miscellaneous deduction. This amount is added to your other miscellaneous deductions and then you must subtract 2 percent of your adjusted gross income to ascertain your deduction value.
For example, if your Roth IRA loss is the only miscellaneous deduction, you claim a $5,000 loss and your adjusted gross income is $50,000, you would subtract $1,000 (2 percent of $50,000) from $5,000 to find that your deduction would be $4,000.
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