Should You Sell for a Loss in an IRA?
When stock values decline, many investors may be tempted to take advantage of tax-loss selling in their tax-sheltered accounts. But is this wise?
Losses from traditional, Roth, and nondeductible IRAs (along with nondeductible IRAs) are never tax-exempt as long as their cost basis remains below their current account value; however, there may be specific rules which must be taken into consideration.
Assets Are Permanently Removed
Retirement accounts have become an integral component of many investors’ financial plans, particularly traditional individual retirement arrangements (IRAs). Investment growth in an IRA can accumulate tax-deferred until withdrawals begin upon retirement.
Losses are part of investing, and can sometimes have a lasting effect on your IRA balances – in some cases they could even offset some of your gains.
Investors can use their IRAs to diversify their portfolios across asset classes, economic sectors and geographic regions in order to reduce risk and provide stability during volatile markets. It is also common practice to rebalance these investments periodically by shifting gains into under-performing assets.
Investors selling losers in their taxable accounts may be eligible to deduct these losses against capital gains or ordinary income up to a certain limit, while this isn’t true of traditional IRAs as losses can only be deducted against assets with basis – most traditional IRAs don’t contain much in this regard.
Taxes Are Deducted
Tax loss harvesting offers an IRA account holder the potential to maximize their tax deductions when selling investments that have lost value, offsetting capital gains within their accounts. When considering this strategy it’s essential to be mindful of transaction costs and time horizon.
Maintaining detailed records is vital when investing, such as calculating an investment’s original cost and any losses, which are determined by subtracting sale proceeds from its purchase price. Also important is adhering to the IRS wash-sale rule, which prohibits purchasing an identical investment within 30 days after selling for a loss and disallowing your loss deduction deduction.
Tax loss harvesting can be an effective strategy for those with small IRA losses who wish to maximize their tax savings, particularly given that the Tax Cuts and Jobs Act has taken away miscellaneous itemized deductions while simultaneously lowering standard deductions. It may not make financial sense for individuals with larger balances who do not anticipate reaching IRS thresholds of more than 2% in itemized deductions or contributions.
Withdrawals Are Taxed
As investments change in value, your IRA balance may change accordingly. While this is normal and should be monitored frequently to make sure it still aligns with your long-term investment goals and risk tolerance, regular review is beneficial in keeping track of where it stands.
When withdrawing funds from an IRA, they are considered ordinary income and subject to taxes; even if your distribution includes investment losses.
Rollover your distribution within 60 days to another IRA is one exception to taxation; otherwise it is considered taxable and subject to a 10% penalty if you are under age 59 1/2. The IRS sends Form 1099-R reporting your distribution information, while online tax calculators allow you to estimate any deductions due to investments data within your IRA account. In addition, working with an experienced financial advisor is invaluable when investing your retirement savings successfully.
Wash-Sale Rules Apply
The IRS’ wash-sale rule disallows losses when you purchase “substantially identical” investments within 30 days before or after selling an IRA and can prove costly if breached.
IRAs offer investors a great way to harvest losses, but you must be wary not to breach wash-sale rules and miss out on tax deductions. Working with an experienced financial professional who understands tax loss harvesting rules will ensure success.
As an illustration of this rule, imagine selling at a loss and then repurchasing that same stock in an IRA; that will constitute a wash sale and prevent you from deducting its loss. Therefore, before selling for a loss from an IRA or Roth IRA account, all nondeductible contributions and gains must be liquidated from their accounts before selling anything at a loss can take place.
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