When the value of your investments in a Roth IRA (Roth Individual Retirement Account) decreases, you might wonder if there is a way to write off those losses on your federal income tax return. Find out what tax deductions you can and can't take when it comes to your Roth IRA.
Having made it a point to carefully grow your retirement fund, when the value of your investments in a Roth IRA (Roth Individual Retirement Account) decreases, you might wonder if there’s a way to write off those losses on your federal income tax return. The Internal Revenue Service does not permit you to deduct losses from your Roth IRA on a year-to-year basis, so the only way to deduct your losses is to close your Roth IRA accounts.
Additionally, this deduction is only available through 2017. For tax years after 2017, the deduction described below is no longer available.
Qualifying for a tax deduction
Only in very rare situations can you deduct losses in your Roth IRA account. To qualify for the deduction, you must close all of your Roth IRA accounts, including Roth IRA accounts that have profits.
Your traditional IRAs need not be closed, as they are treated separately, and the value of your Roth IRA from the previous year or at any point during the time the account was open does not matter. You must show a loss from your tax basis in the account.
Figuring your tax deduction
Your deduction is equal to the amount by which your tax basis exceeds your total withdrawals from your Roth IRAs. Your tax basis is the total amount of your contributions to the Roth IRA because these contributions are made with after-tax dollars.
For example, if over the years you have contributed $25,000 to your Roth IRA but receive $15,000 when you close the account, you would have a net loss of $10,000.
Reporting your deduction
The deduction for Roth IRA losses is an itemized deduction, which means you must itemize on your tax return and cannot claim the standard deduction. If you are already itemizing, this is not significant. However, if you were not planning to itemize, make sure that the total amount of your itemized deductions is greater than your standard deduction.
To claim the deduction, you must file your taxes using Form 1040 and report the deduction on Schedule A. Report the amount of your Roth IRA loss as a miscellaneous deduction. This amount is added to your other miscellaneous deductions and then you must subtract 2 percent of your adjusted gross income to ascertain your deduction value.
For example, if your Roth IRA loss is the only miscellaneous deduction, you claim a $5,000 loss and your adjusted gross income is $50,000, you would subtract $1,000 (2 percent of $50,000) from $5,000 to find that your deduction would be $4,000.
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FAQs
The Internal Revenue Service does not permit you to deduct losses from your Roth IRA on a year-to-year basis, so the only way to deduct your losses is to close your Roth IRA accounts.
Are Roth IRA deductions tax-deductible? ›
Contributions to a Roth IRA aren't deductible (and you don't report the contributions on your tax return), but qualified distributions or distributions that are a return of contributions aren't subject to tax. To be a Roth IRA, the account or annuity must be designated as a Roth IRA when it's set up.
What to do if your IRA is losing money? ›
The key, however, is to stay cool when that happens and not rush to sell off investments in that account when they're down. If you do that, you'll lock in your losses. If you sit tight, you can give your IRA a chance to recover, which it's likely to do.
Do I get a tax credit for Roth IRA? ›
A nonrefundable tax credit is available to eligible taxpayers who contribute to a traditional or Roth IRA or an employer-sponsored retirement plan.
What happens if I contribute to Roth IRA without earned income? ›
The IRS gets a little grumpy if you contribute to a Roth IRA without what it calls earned income. That usually means that you need a paying job—working for either someone else or your own business—to make Roth IRA contributions.
Can you deduct losses in a Roth IRA? ›
The Internal Revenue Service does not permit you to deduct losses from your Roth IRA on a year-to-year basis, so the only way to deduct your losses is to close your Roth IRA accounts.
How much will a Roth IRA reduce my taxes? ›
While Roth IRAs don't lower your taxes when you contribute, they allow your money to grow tax-free indefinitely. Eliminating the taxes from your earnings can make a significant difference in your investment balance over time.
How do I report IRA losses? ›
Generally, when you have a casualty or theft, you have to file Form 4684. You may also have to file one or more of the following forms. Schedule A (Form 1040). Schedule A (Form 1040-NR) (for nonresident aliens).
Can you write off losses in a 401k? ›
Generally, you cannot claim a capital gains loss on your retirement accounts that already are receiving favorable tax treatment. The only time you would have a loss is when you receive a distribution that had previously been taxed. For more information, see About Publication 575, Pension and Annuity Income.
What happens if I sell stock in my Roth IRA? ›
If you sell shares in a mutual fund in a Roth IRA and take out the proceeds, you won't owe any tax as long as you meet the criteria for a qualified distribution because the Roth IRA's contributions were taxed when they were added.
A Roth IRA is an Individual Retirement Account to which you contribute after-tax dollars. While there are no current-year tax benefits, your contributions and earnings can grow tax-free, and you can withdraw them tax-free and penalty free after age 59½ and once the account has been open for five years.
Can I get a tax refund on Roth IRA? ›
Traditional IRA contributions can be used as tax deductions, while Roth contributions cannot. Roth IRA Versus Traditional IRA Because Roth IRA contributions are not tax-deductible, it means that contributing to a Roth IRA will not increase your tax refund.
Does money in a Roth IRA grow tax-free? ›
With a Roth IRA, contributions are not tax-deductible, but earnings can grow tax-free, and qualified withdrawals are tax- and penalty-free. Roth IRA withdrawal and penalty rules vary depending on your age, how long you've had the account, and other factors.
Why is my Roth IRA not taxable income? ›
Roth IRA contributions aren't taxed because the contributions you make to them are usually made with after-tax money, and you can't deduct them. Earnings in a Roth account can be tax-free rather than tax-deferred. So, you can't deduct contributions to a Roth IRA.
Do I have to report Roth IRA contributions on my tax return? ›
Roth IRA accounts are funded with after-tax dollars—meaning you will pay taxes on it when you deposit the funds. Roth contributions aren't tax-deductible, and qualified distributions aren't taxable income. So you won't report them on your return.
At what age can you no longer contribute to a Roth IRA? ›
For 2020 and later, there is no age limit on making regular contributions to traditional or Roth IRAs. For 2019, if you're 70 ½ or older, you can't make a regular contribution to a traditional IRA.
Why is my IRA contribution not tax deductible? ›
Your ability to deduct an IRA contribution depends on how much you earn, whether you or your spouse already contribute to another plan(s), and the type of IRA you have. Limits are adjusted every year for inflation.
Does contributing to an IRA reduce your taxable income? ›
IRAs are another way to save for retirement while reducing your taxable income. Depending on your income, you may be able to deduct any IRA contributions on your tax return. Like a 401(k) or 403(b), monies in IRAs will grow tax deferred—and you won't pay income tax until you take it out.
Are HSA contributions tax deductible? ›
HSA Tax Advantages
Health Savings Accounts offer a triple-tax advantage* – deposits are tax-deductible, growth is tax-deferred, and spending is tax-free. All contributions to your HSA are tax-deducible, or if made through payroll deductions, are pre-tax which lowers your overall taxable income.
