Can a Loss Be Deducted From a Retirement Account?
Losing money on your retirement savings can seriously impact when you get to retire. In most cases, you can't write these losses off. However, you might be able to write them off in certain, limited, situations. Before you attempt this, though, you should know what is eligible to be written off on your tax returns.
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Identification
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You are not normally able to write off losses in a retirement account. If you do write off losses from a retirement account, you can only do so with accounts that have non-deductible contributions. This includes traditional IRAs, in which you have elected to make non-deductible contributions with the IRS, annuities and Roth IRAs.
Significance
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The significance of writing off your losses is that it is not a capital loss. Instead, losses are considered a miscellaneous itemized deduction. The deduction is taken on Schedule A of your taxes. Additionally, losses are only deductible to the extent that they exceed 2 percent of your adjusted gross income. Any amount under this percentage is not included in your write-off.
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Benefit
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By writing off losses in your retirement account, you reduce your taxable income. This has the effect of helping you recover some of your loss through decreased taxes on current income. The increase in your income in the year you claim the loss can then be used to invest for your retirement.
Disadvantage
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The disadvantage of writing off losses on your retirement savings is that you must close your retirement account. You must liquidate all of your retirement accounts to claim the loss. The loss is only considered when your liquidated amount is less than the amount you contributed to the account. When you do close your retirement accounts, you have to start over in terms of saving for retirement. If you want to use another retirement account, you must open one and obey the contribution rules. This could prevent you from accumulating significant tax-deferred retirement savings, since you must make your contributions over time instead of being able to make one lump sum deposit into a new retirement account.
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