Can I Deduct Roth IRA Losses That Occurred Over a Period of Years?
Roth IRAs are savings vehicles that often take contributions over years as part of a long-term retirement savings plan. If your Roth IRA is invested in something that fluctuates, such as stocks or mutual funds, you might realize losses in the account. Since the Roth IRA doesn't have annual tax considerations, the only way you can realize losses incurred over years is to liquidate.
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Less Than Contributed
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The Internal Revenue Service allows Roth IRA losses only if the entire IRA is liquidated for less than was put in. Duration is irrelevant. The losses can be incurred over a short or long period of time. If you put in $15,000 over the course of four years and liquidated the entire Roth IRA for $14,000, there is a loss the IRS allows. Partial deductions do not permit losses.
Type of Loss
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There are no capital gains or losses when dealing with Roth IRAs. The loss you realize is a Miscellaneous Itemized Deduction. To get the deduction, complete Schedule A when filing personal income tax returns. Even if there is a loss, you might not be able to realize all of it. The reason is there is a floor calculated on Schedule A based on your adjusted gross income. Your losses must be higher than the floor. So in the case where there is a $1,000 loss, if the floor is $1,000 or more, there is no loss applied against income.
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Calculating the Floor
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The IRS uses Adjusted Gross Income to calculate the floor. The floor is 2 percent of the AGI. Assume you have $100,000 in AGI, the floor is $2,000: $100,000 times 2 percent equals $2,000. In the case of the $1,000 loss discussed previously, the $1,000 doesn't meet the floor. No loss is claimed. If the $15,000 Roth were instead liquidated for $12,000 with the same $2,000 floor, the $2,000 floor is subtracted from $3,000 difference, leaving a $1,000 loss that can be realized.
Considerations
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Your Roth IRA might be sitting at a loss, but that isn't reason enough to liquidate it and take the loss. Equities go up and down. If you don't need the money, don't liquidate. If you are unhappy with the investment, changing the investment or performing a transfer with the IRA might be a better option. This allows the Roth assets to continue the tax-free growth under a new investment. Once the money is distributed, you will never get those funds back in a Roth tax structure again.
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