Tax advantage to a Roth IRA loss?

[Guest PaulRo]

In '98 I converted a Traditional IRA to a Roth IRA. Taxes were paid on a conversion of $17K. I have made no contributions since and it is now valued at $10K. Can I withdraw since it has been over 5 years, transfer the Roth to another broker and write off the loss?

[John G]

A transfer of the account to another Roth does not allow you to take a write-off for the loss.

While a write-off is technically possible if you close your account, the hurtles are tough.

From Publication 590: "Recognizing Losses on IRA Investments --

If you have a loss on your traditional IRA investment, you can recognize the loss on your income tax return, but only when all the amounts in all your traditional IRA accounts have been distributed to you and the total distributions are less than your unrecovered basis, if any. Your basis is the total amount of the nondeductible contributions in your traditional IRAs. You claim the loss as a miscellaneous itemized deduction, subject to the 2% limit, on Schedule A, Form 1040." {this applies to Roth and regular IRAs, but each group are treated as a separate group}

Note the key elements: you must withdraw ALL funds in your IRA(s) (all Roths or all regular IRAs or all IRA/Roths if you are trying to claim losses in both types) and even then you have the Schedule A restriction. (In some circumstances, others might incur a 10% penalty for early withdrawal.) You lose the tax shelter, may (not in your case) incur a penalty and are limited in that loss you can write off. I just don't think many people will find this second approach attractive. If you had a HUGE losses this might make sense, but I don't think 7k loss comes close. If you think otherwise, consult your tax advisor.

I sure hope that you will ponder the investment decisions you are making. IRA investing is not equivalent to betting on the ponies. You don't need to find 30% or 50% annual gains to be successful. Grinding out a 10 or 11% average annual return will often allow you to reach your goals. If you plunked most of your assets down on just one investment then you are not diversifying and increasing your risk. Hopefully, you have learned some valuable lessons with for the "tuition" that you have paid.

It is not normal to be down 40% after seven years. A reasonable goal would been to have doubled your assets to $34k. Rather than focus on a possible tax write-off, I would spend some time thinking about your investments. Were your investments too narrowly cast? Did you chase last years big winners? Did you fail to monitor your investments? Did you rely on "tips" rather than real time spent researching your choices? Did you take a high risk approach to investments hoping for home runs? You give no clues.

You might be able to help other investors who are just getting started by posting again about what you did and what you learned.

[BPickerCPA]

Just so there is no misunderstanding, if you have both traditional IRAs AND Roth IRAs, you do NOT need to withdraw all of the traditional IRAs in order to take a loss on the Roth IRAs. You would, as John pointed out, have to withdraw ALL of your ROTH IRAs in order to claim the loss on the Roth.

[John G]

Thanks Barry, I will clear that up in my earlier post.

[Guest PaulRo]

Thanks for the advice on my investment. Doing some additional research, it looks as if I will be able to close my Roth account, receive payment without penalties since it's been longer than 5 years and write-off the loss over the next couple of years. I would like to note that this was just part of my overall investments. It is a must to diversify contributing to Traditional IRA's through employer, purchasing mutual funds and investing in stocks. Assuming inflation stays in check, it looks like the market is ready to rise and do well over the next several years.

Looking back I probably should have made contributions to the Roth on a regular basis as this is a great way to invest without paying the government later since only earnings are taxed. If anyone has information about the over $100k rule, please respond. I would like to transfer $ from my traditional to my Roth.