At times, determining deductions and adjusted gross income can be difficult enough on its own. When you begin making contributions to a pretax IRA, those waters become more muddy. Funds contributed to an IRA receive different tax treatment in the year you make them than regular earnings, and at rare times you may claim losses to the value of a pretax IRA. Employers who make matching or nonelective contributions to SIMPLE IRA plans may claim those contributions.
The ability to contribute income to an IRA on a pretax basis is one of the largest draws of investing in the retirement account type. If you make contributions to a qualified IRA, you may claim the deducted amount -- up to $5,000 per year, or $6,000 if you're 50 or older -- as a deduction to your income taxes, essentially reducing your taxable income by the amount of the contribution. Your employer still withholds Social Security and Medicare taxes from these earnings. Additionally, you don't avoid income taxes on pretax contributions, but merely defer them to a later year: When your receive a distribution from an IRA, the IRS taxes it as earned income.
Deducting Losses in IRA Value
Ideally, your IRA contributions would have grown over time to provide you with a sizeable nest egg, but large fluctuations in the market can decimate the value of an IRA. The Internal Revenue Service (IRS) allows you to claim losses on pretax IRAs only if you liquidate the value of every IRA you hold -- you can't liquidated a non-performer and hold onto one that gets returns -- and the aggregate amount raised is less than the total amount of pretax contributions you made to the account, you may claim the difference between the tax basis -- total pretax contributions -- and the sale amount as a deduction. If your IRAs' value declined to $0, however, you have no basis for a sale of the assets, and thus can't claim losses.
Claiming Losses in IRA Value
Even if you close all your IRAs and tally a loss from the tax basis, you may not be able to capitalize on the loss as a deduction. The IRS requires you to classify losses in pretax IRA contributions as a miscellaneous deduction, claiming the loss on Schedule A. You may only deduct miscellaneous losses when they exceed 2 percent of your adjusted gross income, so a small IRA loss that isn't coupled with other losses may not be large enough to claim. Additionally, your total itemized losses from Schedule A must exceed the standard deduction of $5,800 for individual filers or $11,600 for married couples filing jointly.
SIMPLE Employer Contributions
Employers with less than 100 employees may establish a SIMPLE IRA program, which allows them to make pretax contributions to employees' IRA accounts. Under this plan, an employer must make a 3 percent matching contribution to workers who participate or a 2 percent nonelective contribution to all employees to qualify. Employers who make qualifying SIMPLE contributions may claim deductions on a dollar for dollar basis.
- IRS.gov: Publication 590 - Traditional IRAs
- IRS.gov: Publication 529 - Miscellaneous Deductions
- AARP: Frequently Asked Questions: Pensions;
- U.S. Department of Labor: SIMPLE IRA Plans for Small Businesses
- Smart Money; How to Deduct IRA Losses; Bill Bischoff; December 2008
- Bankrate.com; Deducting IRA Losses; George Saenz; April 2007
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