Can I Claim a Loss From the Sale of a Mutual Fund in a Qualified IRA?

by Mike Parker

Individual retirement accounts (IRAs), are tax-advantaged accounts that allow you to set aside a portion of your earnings toward your retirement years. Mutual funds may be an appropriate investment vehicle for your IRA because they provide you with both diversification of your assets and professional management of your portfolio. Any gains generated by a mutual fund in your traditional IRA grows tax deferred, while earnings in your Roth IRA grow tax free. As with any mutual fund investment, there is also the possibility of taking a loss on your investment.

Traditional IRAs

You can deduct contributions you make to your traditional IRA from your income when you file your federal income tax return. Your contributions are made with pre-tax dollars, so more of your money goes to work earning a return. All the funds in your traditional IRA grow without creating a taxable event until you withdraw them. All the funds you withdraw from your traditional IRA are taxed as ordinary income at your then current tax rate, which presumably will be lower during your retirement years than it is when you are in your prime earning years.

Mutual Fund Losses in a Traditional IRA

It is possible to lose money in a mutual fund, whether or not the fund is held in your traditional IRA. You may deduct your mutual fund losses within your traditional IRA when you file your federal income tax return, but you must wait until all funds in your traditional IRA accounts have been distributed to you. The total distribution from your traditional IRA must be lower than your unrecovered basis, which is the total amount of any nondeductible contributions you made to your traditional IRAs. You must itemize your deductions on Schedule A of IRS Form 1040 to claim this loss on your taxes. You must include this loss with your miscellaneous itemized deductions which are subject to the Internal Revenue Service's 2 percent limit.

Roth IRAs

You cannot deduct contributions you make to your Roth IRA from your income when you file your federal income tax return. Your contributions are made with after tax dollars. All the funds in your Roth IRA grow without creating a taxable event until you withdraw them. You can withdraw your contributions at any time for any reason without creating a taxable event, since you have already paid taxes on these funds. If you leave your earnings in the Roth IRA for at least five years and start withdrawing them after you reach 59 1/2 years of age, all the earnings can be withdrawn tax free.

Mutual Fund Losses in a Roth IRA

You may deduct your mutual fund losses within your Roth IRA when you file your federal income tax return, once all funds in your Roth IRA accounts have been distributed to you. The total distribution from your traditional IRA must be lower than your unrecovered basis. Unlike your contributions to a traditional IRA, all contributions to a Roth IRA are made with nondeductible contributions, so losses in a Roth IRA may be easier to claim. You must itemize your deductions on Schedule A of IRS Form 1040 to claim this loss on your taxes. You must include this loss with your miscellaneous itemized deductions which are subject to the Internal Revenue Service's 2 percent limit.

About the Author

Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.

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