How Do You Account For Losses in an IRA?

Your IRA investments may fluctuate, especially during times of market instability, which may make you anxious. But staying on course is best.

Investment losses incurred in tax-advantaged accounts such as an IRA must be deducted when filing taxes as part of your itemized deductions; specifically, it must exceed 2% of your adjusted gross income to qualify.

Determining the Tax Basis

Your IRA basis consists of your post-tax contributions; therefore, any non-return of tax-deductible contributions when taking distributions should qualify for loss deduction. Tracking this figure is key as it will help avoid double taxation of IRA distributions while making sure taxable withdrawals do not surpass tax-free amounts.

Basis information can be reconstructed using summaries of past years’ Form 5498s (Individual Retirement Arrangement Contribution Information), or by requesting a Wage and Income Transcript from the IRS. Maintaining accurate record-keeping practices also ensure compliance with IRS regulations while decreasing chances for disputes with tax authorities.

One common way that basis can be lost occurs when clients die and their after-tax IRA funds are distributed to beneficiaries, as many do not know of its existence and thus double taxation occurs when taking future distributions from these accounts.

Determining the Tax Deduction

As is true with all investment transactions, maintaining detailed records is of utmost importance. This should include your original cost, purchase/sale dates, transaction costs associated with both and transaction costs associated with both parties involved in any given investment transaction.

If your IRA incurs a loss, its tax deduction can be determined by subtracting sale proceeds from your original investment cost. Traditional and Roth IRA owners can deduct these losses on their federal income tax returns under miscellaneous itemized deductions; however, due to changes included in the Tax Cuts and Jobs Act of 2017, this deduction has now been limited to 2 percent or less of adjusted gross income.

Before taking advantage of an IRA loss deduction, it’s best to consult both with your financial advisor and a tax professional. In doing so, you can assess whether it makes financial and investment sense as well as devise a comprehensive tax strategy designed to maximize deductions and avoid potential early distribution penalties of 10%.

Determining the Distribution Amount

If the value of your traditional IRA drops significantly, it’s essential that you assess if its decline is enough to trigger a distribution. Distributions from an IRA typically count as ordinary income even though contributions were made after-tax (known as basis).

Normaly, you could recognize a loss if distributions were less than your basis; however, this only applies if all nondeductible IRA accounts as well as Roth IRA accounts were cashed out – otherwise a tax loss cannot be deducted.

To determine your distribution amount, begin with the fair market value of each account as of December 31 and divide by your age from IRS Publication 590-B tables (single life expectancy table or uniform lifetime table). Your IRA custodian can assist in calculating RMD; additionally, strategic choices concerning amortization or annuitization methods can have an enormous effect on final distribution amount.

Determining the Distribution Date

Your IRA balances may fluctuate as assets in your accounts increase or decrease in value; this is perfectly normal, yet it’s important to remember that taking needless losses by selling investments when they are underwater could cost you in future gains.

Tax-loss selling in an IRA typically only makes financial sense for individuals with modest losses in their IRA and who itemize deductions on Schedule A, since the IRS allows IRA losses to count as miscellaneous itemized deductions (up to 2 percent minimum of adjusted gross income reported on Schedule A) or used as offset against capital gains that might otherwise become taxable.

Tax calculators can assist in estimating potential deductions from your IRA losses. Furthermore, working with a financial advisor may offer valuable insight into your particular circumstances and ensure you’re making the most out of your IRA’s tax benefits.

Raymond Banks Administrator
Raymond Banks is a published author in the commodity world. He has written extensively about gold and silver investments, and his work has been featured in some of the most respected financial journals in the industry. Raymond\\\'s expertise in the commodities market is highly sought-after, and he regularly delivers presentations on behalf of various investment firms. He is also a regular guest on financial news programmes, where he offers his expert insights into the latest commodity trends.

Categorised in: