Losses on IRA Investments

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%-of-adjusted-gross-income limit that applies to certain miscellaneous itemized deductions on Schedule A, Form 1040. A similar rule applies to Roth IRAs. The rule applies separately to each kind of IRA. Thus, to report a loss in a Roth IRA, all the Roth IRAs (but not traditional IRAs) owned by you have to be liquidated, and to report a loss in a traditional IRA, all the traditional IRAs (but not Roth IRAs) owned by you have to be liquidated.

Example. Bill King has made nondeductible contributions to a traditional IRA totaling $2,000, giving him a basis at the end of 2000 of $2,000. By the end of 2001, his IRA earns $400 in interest income. In that year, Bill receives a distribution of $600 ($500 basis + $100 interest), reducing the value of his IRA to $1,800 ($2,000 + 400 - 600) at year's end. Bill figures the taxable part of the distribution and his remaining basis on Form 8606 (illustrated).

In 2002, Bill's IRA has a loss of $500. At the end of that year, Bill's IRA balance is $1,300 ($1,800 - 500). Bill's remaining basis in his IRA is $1,500 ($2,000 - 500). Bill receives the $1,300 balance remaining in the IRA. He can claim a loss for 2002 of $200 (the $1,500 basis minus the $1,300 distribution of the IRA balance). Bill completes Form 8606 as illustrated.

Annuity Contracts

Distribution of an annuity contract from your IRA account. You can tell the trustee or custodian of your traditional IRA account to use the amount in the account to buy an annuity contract for you. You are not taxed when you receive the annuity contract. You are taxed when you start receiving payments under that annuity contract.

Tax treatment. If only deductible contributions were made to your traditional IRA since it was set up (this includes all your traditional IRAs, if you have more than one), the annuity payments are fully taxable.

If any of your traditional IRAs include both deductible and nondeductible contributions, the annuity payments are taxed as explained earlier under Distributions Fully or Partly Taxable.

Cashing in retirement bonds. When you cash in retirement bonds, you are taxed on the entire amount you receive. Unless you have already cashed them in, you will be taxed on the entire value of your bonds in the year in which you reach age 70 1/2. The value of the bonds is the amount you would have received if you had cashed them in at the end of that year. When you later cash in the bonds, you will not be taxed again.

This article may be used for basic information and educational purposes. This is not intended to apply to specific circumstances and is for "general knowledge only". Reading of this article is subject to the blanket and general disclaimers attached hereto -

Disclaimer for all except securities related articles