Taxation
Topic
We all make investments to get profitable returns. But what happens if you don't make a profit? In standard taxable investments, reporting capital gains and losses is straightforward.
What are Generally Accepted Accounting Principles?
IRA does not recognize losses or gains. In fact, the only way you can deduct losses in IRA is after withdrawing all the funds in the account and with a good reason. In this case, there is non-deductible funds which are minimal, if any, intraditional IRAs.
Changes under Tax Cuts and Job Acts
As a result of this Act, any loss on IRA investments was suspended from 2018 to 2025. Previously, these deductions were made under ScheduleA as follows;
· The IRA losses were reported under itemized deductions subject to 2% of the adjusted gross income.
· You were to distribute the balance in the other IRAs of the same type to claim the loss.
· The loss was deductible if the balance available was less than the after-tax amount.
Deducting IRA losses was profitable for persons older than 591/2 to evade the 10% penalty on early distribution.
How to Withdraw Balances to ClaimIRA Losses Before 2018
To claim a loss on your IRA account, you were required to withdraw the money from all your similar IRAs. For instance,if the loss was in a traditional IRA account, you were required to withdraw the balances from all the other traditional IRA accounts. Simply put, if you had a loss in one account and the other accounts had gained, only the total of the same type of accounts mattered.
1. Traditional IRA Loses
Before 2018, losses were deductible only if what you withdrew was less than the basis or after-tax amount in the traditional IRAs. The after-tax amount consisted of roll-overs of after-tax from 457(b)and 403(b)plans and non-deductible contributions.
To determine the after-tax you withdrew from your traditional IRAs, they would check on Form 8606 filed to IRS. This form also showed the amount eligible as a loss and after-tax amount.
Example:
In January 2016, John had an aggregate balance of $40,000 in his traditional IRAs. In this amount, $30,000 is the after-tax amount. By the end of the year, his traditional IRA had lost $16,000,leaving him with a balance of $ 24,000. This balance is less than the after-taxof $30,000. Therefore, if John's AGI was $200,000, the allowable deduction should be $2,000.
Calculations:
· To calculate the IRA closing balance;
Traditional IRA opening balance – IRALosses =Traditional IRA closing balance
$40,000 - $16,000 = $24,000
· To calculate the eligible loss;
Tax-deductible amount – Closing balance =eligible loss on IRA
$30,000 - $24,000 = $6,000
· To get the allowable deduction;
Eligible loss on IRA – 2% of AGI =Allowable deduction
$6,000 - $4,000 (2% x $200,000) = $2,000
2. ROTH IRA Loses
The same rules in traditional IRA apply in ROTH IRA. Claiming your ROTH losses were allowed only if the amount withdrawn was less than the total amount in all your ROTH IRAs.
Example:
At the start of 2015, John had ROTH IRA balances of $20,000. $12,000 was earnings, and the balance of $8,000 was contributions. In ROTH IRA, the contributions are the basis or after-tax amounts. John lost $4,000 in the year, leaving his ROTH IRA account with$16,000. This balance is more than the after-tax of $8,000.
If John withdraws his ROTH IRA balances now, he will not have any allowable deduction to claim.
Opening balance - Loss = Closing balance
$20,000 - $4,000 = $ 16,000
After-tax (basis) – Closing balance=Allowable deductions
$8,000 - $16,000 = -$8,000
No deduction allowable
Bottom Line
Before reporting any IRA loss, pleaseconsult a tax professional and financial advisor, especially now that they arenot deductible on your tax returns. The consultation will help you decidewhether to withdraw all IRA amounts and how to maximize the itemized deductions.
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