Roth investment retirement accounts (IRAs) have a tax basis because you make after-tax contributions to them. As such, you may be able to claim a deduction for your loss on a Roth IRA if you close it. However, because of the requirements imposed by the IRS, it is very difficult, and rarely financially practical, to claim a loss on your Roth IRA.
In order to claim a loss for your Roth IRA losses, you must liquidate all Roth IRAs set up in your name. Other IRAs, such as traditional IRAs and SEP IRAs can be left open. For example, if you have one Roth IRA doing well and another Roth IRA losing money, the IRS would not permit you to cash out the Roth IRA doing poorly and claim a loss. Instead, you would have to close both IRAs and calculate the combined loss.
Calculating Your Loss
Your tax-deductible loss on your Roth IRA is calculated by subtracting all the proceeds you have received from your Roth IRA from the total contributions made to the account. You cannot base your loss of the maximum value of your Roth IRA, or even of the value at the beginning of the year. For example, if you put $50,000 in your Roth IRA over a certain number of years, you would have to take a total distribution of less than $50,000 to claim a loss. Even if your Roth IRA had grown to $300,000 but in the past year lost $240,000, since you would receive $60,000 when you cashed it out, you could not claim a loss.
To claim a Roth IRA loss, you have to itemize your income tax deductions and forgo the standard deduction. In addition, the IRS classifies Roth IRA losses as a miscellaneous income tax deduction. This means that only the amount by which the loss exceeds 2 percent of your adjusted gross income can be deducted. For example, if you have a net loss of $8,000 on your Roth IRA closures, and your adjusted gross income for the year equals $50,000, you would only be able to claim a $7,000 deduction.
When you close out your Roth IRAs to claim the deduction, you eliminate all the tax-sheltered money that you built up in the Roth IRA over the years. In future years, you cannot put extra funds into your Roth IRA to make up for all the money you took out. Also, if you invest the money you cashed out of the Roth IRA, it no longer grows tax-free, which can hamstring your retirement savings efforts.
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