Marguerita is a Certified Financial Planner (CFP), Chartered Retirement Planning Counselor (CRPC), Retirement Income Certified Professional (RICP), and a Chartered Socially Responsible Investing Counselor (CSRIC). She has been working in the financial planning industry for over 20 years and spends her days helping her clients gain clarity, confidence, and control over their financial lives.
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We all hope that our investments will produce profitable returns. But if they don't, there was previously the consolation of taking a tax deduction for the loss. In regular taxable investment accounts, reporting capital losses is pretty simple and straightforward. However, losses on investments in IRAs could be claimed only if certain stringent requirements were met.
Under the Tax Cuts and Jobs Act (TCJA), certain miscellaneous itemized deductions were suspended for tax years 2018 through 2025. Previously, these miscellaneous itemized deductions were presented on Schedule A; they were only deductible to the extent they exceeded 2% of the taxpayer's adjusted gross income (AGI).
For example, if a taxpayer had an AGI of $100,000 and an eligible miscellaneous expense of $5,000, they could only deduct $3,000.
As a result of the TCJA, the option to claim a loss on IRA investments is no longer available as of 2018.
To claim a loss on IRA investments, you were required to 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 would have been required to withdraw the balances from all of your traditional, SEP, and SIMPLE IRAs (hereafter collectively referred to as traditional IRAs).
If the loss occurred in a Roth IRA, you were required to withdraw balances from all your Roth IRAs to include the loss on your tax return. Simplified, this means even if you had one account with a loss and multiple others with gains, what mattered was the aggregate of all accounts of the same type.
You could deduct your traditional IRA losses for 2017 and earlier only if the total balance that you withdrew was less than the after-tax amounts (basis amounts) in your traditional IRAs. Your IRA basis is attributed to nondeductible contributions and rollovers of after-tax amounts from qualified plans, 403(b) accounts, and 457(b) plans.
You would have filed IRS Form 8606 to determine the basis of the amounts you withdrew from your traditional IRAs. Form 8606 also served to indicate to the IRS the portion of your withdrawal that was attributed to after-tax amounts and the amount that was eligible to be claimed as a loss on your tax return. Form 8606 and its accompanying instructions are available on the IRS website.
Here is an example of how this process worked.
At the beginning of 2017, Tim's aggregate traditional IRA balance is $20,000, of which $15,000 is attributed to after-tax amounts. By Dec. 31, 2017, 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 eligible loss would be the difference between the balance he withdraws ($12,000) and his basis ($15,000). If Tim's AGI was $100,000, the allowable deduction for his traditional IRA loss would be limited to $1,000 under the 2% rule.
Here is how the deduction is determined:
Consulting a tax professional will allow you to maximize the returns you are able to receive on all of your retirement investments.
The same rules apply to Roth IRAs. Claiming Roth IRA losses on your tax return was allowed only if the total of your Roth IRA balances were withdrawn, and the amount withdrawn was less than the basis in your Roth IRAs.
At the beginning of 2017, Tim's Roth IRA balance is $10,000, of which $6,000 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 2017, Tim's Roth IRA investments lost $2,000, leaving his balance at $8,000. This amount is more than his basis amount of $4,000; if Tim withdraws his entire Roth IRA balance at this point, he will not be able to include the losses on his tax return:
Taxpayers were permitted to claim the loss as a miscellaneous itemized deduction, subject to the 2%-of-adjusted-gross-income limit that applies to certain miscellaneous itemized deductions on Schedule A, Form 1040. Any such losses are added back to taxable income for purposes of calculating the alternative minimum tax.
"Deducting IRA losses works best if you are older than 59½ to avoid the 10% early distribution penalty," says Dave Anthony, CFP®, RMA®, president and portfolio manager of Anthony Capital, LLC, Broomfield, Colo.
For 2023, individuals can contribute up to $6,500 to an IRA. This increases to $7,000 in 2024. For both years, if you are 50 and older, you are allowed to contribute an additional $1,000.
A traditional IRA is funded with pre-tax dollars, which lowers your AGI. When you make withdrawals, you are taxed at the ordinary income rate. A Roth IRA is funded with after-tax dollars. Earnings generally grow tax-free and you are not taxed when making eligible withdrawals.
Yes, you can contribute to both a Roth and traditional IRA. You do not have to choose between the two. You just have to ensure that the sum of the amount that you contribute to both does not exceed the annual contribution limits.
Be sure to consult with your financial advisor and tax professional before deciding to withdraw your IRA balances, especially now that losses are no longer able to be deducted on your tax return. Your financial advisor should be able to assist you in determining whether it makes financial sense to withdraw all of your IRA balances, and your tax professional can help you maximize your other itemized deductions.
Once funds are withdrawn from your IRA, they are no longer eligible to grow tax-deferred. Your financial advisor should also analyze your potential for recovering the losses in your IRA prior to withdrawal.
As an alternative, "an advisor can help you find other deductions that you may not be aware of that you could incorporate into your plans, such as charitable contributions, tax bunching, and advisor fees," Anthony says.