Is taking a Tax Loss in Roth IRA possible?

[Guest irr7342]

Like many, I bought a tech fund in my Roth IRA in 1999. Any chance I can sell it and take the loss?

[dh003i]

I believe that if you want to take a tax-loss on your Roth IRA's losses, you would need to close your Roth IRA account. However, this is not adviseable, as you would face the 10% early-withdrawal penalty (which would probably nullify the benefit of any deduction for a capital loss). Furthermore, even if the loss would not be offset by the 10% penalty, that's still money that is not not allowed to grow tax-free. You can put the money back in a Roth IRA, but then it reduces the amount you can contribute this year by that value. This is a retirement investment vehicle...you should be in it for the long-haul (until you're 59.5 or at least 10 years from now, whichever is longer). If you're not willing to commit the money for at least that long, then you should question your decision to place it in a Roth IRA in the first place.

[Mary Kay Foss]

It is possible to take a tax loss in connection with a Roth IRA but not "in" the Roth IRA. A loss is available if you close out ALL Roth IRAs that you have. For example, if the Roth IRA you're concerned about is currently worth $1700 and you had contributed $3,000; you can close it out and have the $1700 distributed to you. The loss ($1,300) would be an itemized deduction subject to the 2% limitation. If you're subject to the AMT there will be no deduction allowed for the loss.

You do not have a 10% penalty with a Roth IRA unless you withdraw earnings and do not meet any of the exceptions from the 10% penalty.

If you have one Roth that has done well and another that has done poorly, a loss is only available if the losses exceed the gains AND all Roth IRAs are closed out in the same year.

I think it's best to hope that the stock will recover or sell the fund within the Roth and invest in something you feel better about.

[Harwood]

http://www.fool.com/taxes/2002/taxes020222.htm