10 (Not So) Simple Steps to Claiming a Deduction for a Roth IRA Loss

I was appearing as a guest on a radio show yesterday when a listener called in, saying that his Roth IRA had lost substantial value. Ultimately, the caller wanted to know if he could claim a deduction for his Roth IRA loss. I told him that the answer was probably “no,” but that a question like that would be exceedingly difficult to answer for sure, given the time I had left on air.

His question - though not as common in recent years thanks to the stock market’s strong performance - is one that is asked quite frequently. So, in order to help illuminate just how complicated and difficult it is to claim a deduction for a Roth IRA loss, I’ve put together these 10 (Not so) Simple Steps to Claiming a Deduction for a Roth IRA Loss. Good luck!

1. Add up the total amount of Roth IRA contributions you’ve made to any one of your Roth IRAs.
2. Add up the total amount of Roth IRA conversions you’ve made to any one of your Roth IRAs.
3. Add up the totals from step #1 and step #2.
4. Add up the total amount of Roth IRA distributions you have taken so far.
5. Subtract your total from step #4 from your total in step #3.
6. Compare the total from step #5 to your current cumulative Roth IRA balance, across all your Roth IRAs.

• If the total from step #5 is less than the current value of all your Roth IRAs, then STOP. You are not eligible to claim a loss for your Roth IRA.
• If the total from step #5 is more than the current value of all your Roth IRAs, then you are potentially eligible to claim a deduction for a Roth IRA loss by taking the following steps. (Note that your deduction may still be reduced or eliminated by a number of factors, as indicated below). The maximum loss you may be entitled to deduct is the difference between the current cumulative value of your Roth IRAs and your total from step #5

7. Estimate your adjusted gross income (AGI) for the year, and all your miscellaneous itemized deductions, including your Roth IRA loss (you may need some help from your tax professional here).

• If the total amount of your miscellaneous itemized deductions, including the Roth IRA loss, is less than 2% of your AGI, then STOP. Your Roth IRA loss would not be deductible on your tax return.
• If the total amount of your miscellaneous itemized deductions, including the Roth IRA loss, is more than 2% of your AGI, then your Roth IRA loss may be deductible, but may still be reduced or eliminated by a number of factors.

8. For 2014, check to see if your estimated AGI is more than $254,200 if you’re a single filer or, if you’re married and file a joint return, if your AGI is more than $305,050.

• If your AGI exceeds your aforementioned threshold, then your Roth IRA loss deduction will be reduced. Though unlikely, you could lose up to 80% of your deduction. Once again, you may need some professional assistance here.

9. Check to see if you are subject to the alternative minimum tax (AMT). A Roth IRA loss deduction cannot be claimed for AMT purposes.
10. IF you’ve actually made it this far and are one of the lucky - or perhaps, not so lucky - few who can claim a deduction for a Roth IRA loss, then take a complete distribution of all your Roth IRAs. Note that while this must be done in order to take a deduction for a Roth IRA loss, it also means the end of your Roth IRA accounts. You will be giving up any tax-free appreciation that may have occurred in later years in the Roth, so just be sure that you weigh the pros and the cons of this move before you take any action.

*Note: If you’ve rolled over money from a Roth 401(k), Roth 403(b) or similar plan, you may be able to add all or a portion of the rolled over amount to your step #3 total. Consult your tax professional.*

- By Jeffrey Levine and Jared Trexler

Posted in: Ed Slott,ed slott ira,ed slott retirement,financial,financial advisor,IRA deduction,IRAs,Jeff Levine,Roth IRA,Tax Planning