How to Account For Losses in an IRA

How do you account for losses in an IRA

Investments held within an IRA may decrease over time. But it’s important to remember that selling losers won’t net you any tax advantages as traditional deductible IRA accounts don’t allow users to recognize losses.

Furthermore, you cannot claim an IRA loss deduction if your miscellaneous itemized deductions surpass the IRS 2% threshold and withdraw before age 59 1/2; your loss would then be subject to taxes and penalties.

Cost basis

Although investments often decline in value over time, investors need to know the amount they can deduct when selling an investment – this amount is known as their cost basis. They can use information found on their 1099-B or substitute statement to calculate this figure or visit their brokerage firm’s website and learn what method they employ for doing this calculation.

Cost basis of an asset is defined by its original purchase price, and serves as the foundation for calculating capital gains and losses for tax purposes. Certain events, including stock splits, issuing specific types of dividends, wash sale adjustments and bankruptcies may alter this calculation significantly.

Additionally, the IRS expects investors to keep records that reflect their cost basis of each security they own, which can help manage your IRA’s tax liability. You may wish to consult with a tax professional regarding your individual situation for advice and guidance.


If you make a loss on an investment held within your IRA, the IRA loss rule prevents this temptation by only permitting cash out when your contributions drop below their balance and require you to fully liquidate the account – losses in IRAs are never tax-deductible unlike losses in taxable accounts.

Under previous tax law, an IRA loss could be deducted on Schedule A as an itemized deduction; however, with changes to tax law now available this deduction no longer exists and may even be adjusted for alternative minimum tax, further diminishing its potential benefit.

There are multiple strategies available to you for getting around the IRA loss rule and its associated penalties. One is tax loss harvesting, in which losing positions are sold off to reduce gains; or switching your IRA into a fixed index annuity that protects it from market fluctuations.


Investment losses incurred within an IRA account are only tax deductible if they’re withdrawn at less than their original basis. That means you must cash out all IRAs (including nondeductible contributions) and Roth IRAs to deduct losses.

When itemizing deductions on Form 1040 Schedule A, any losses must only be used to offset other items on your tax return and can only be claimed up to 2% of adjusted gross income – though if subject to alternative minimum tax this limit can be further diminished.

Therefore, selling losers is often not worth doing in your IRA because there is no tax loss harvesting strategy available for Roth IRAs. Furthermore, any distribution taken may incur a 10% penalty if taken before age 59 1/2; you have 60 days after taking this distribution before it counts as a taxable withdrawal.


Many IRA owners may be wary of making withdrawals and reinvested them outside their retirement account for non-IRA investments; however, this may become necessary due to various reasons, including purchasing a house or paying medical expenses. Sometimes this process can even be completed without incurring the 10% early distribution penalty.

If you own a traditional IRA, any distributions from it are taxed as ordinary income regardless of any investment losses or gains that might occur in its performance. With a Roth IRA however, claiming losses on original contributions is one way of avoiding taxes on distributions but this method only works if all original funds have been liquidated into cash.

If your conversion from traditional to Roth IRA results in its value being diminished, an individual can avoid additional tax by making a one-time modification within one year – provided they make this change due to a divorce or separation instrument.

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.

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