If you invested money in your IRA in stocks, you may find that your investments lost value. Unlike regular IRA accounts, you cannot simply claim a tax deduction for the loss. Instead, the Internal Revenue Services (IRS) has a series of requirements that must be met and rules for calculating how much you can deduct.
To claim a loss in your IRA, you must empty all IRAs of the same type. For example, if you wanted to claim a loss in one of your traditional IRAs, you must take out all the money from all traditional IRAs you own, but Roth IRAs could remain open. Conversely, if you wanted to claim a loss in a Roth IRA, you must close all your Roth IRAs, but not your traditional IRA. To determine your loss, subtract your total distributions from the IRAs from your tax basis in the IRAs.
Calculating Your IRA Basis
The basis in your IRA account equals the sum of all nondeductible contributions to the account. If you have a traditional IRA, only nondeductible contributions to the account increase your tax basis. If you deducted all your traditional IRA contributions, which most people do, you have no tax basis in your traditional IRA and therefore cannot claim a tax deduction for a loss in your traditional IRA. With a Roth IRA, all your contributions increase the tax basis because Roth IRAs require after-tax contributions.
Categorized as a Miscellaneous Deduction
The deduction for losses in your IRA is categorized as a miscellaneous deduction subject to the 2 percent adjusted gross income limit, which means that only the deductions exceeding 2 percent of your adjusted gross income count. For example, if you have a $3,000 loss and your adjusted gross income equals $56,000, you could only claim a deduction of $1,880. In addition, you must itemize your deductions rather than claiming the standard deduction, which can limit the usefulness of the deduction.
Still Owe Applicable Taxes and Penalties
When you empty your IRAs to claim the loss as a deduction, you must still pay any applicable taxes and penalties on the distributions. For example, if you empty your traditional IRA before age 59 1/2, you will owe an extra 10 percent early withdrawal penalty on the taxable portion of the withdrawal. When combined with the fact that you must empty your IRAs, you no longer receive the tax-sheltered growth and cannot put in extra in future years; this can make claiming the deduction financially unwise for some people.