Recognizing a Roth IRA Loss

This section of Roth IRAs information website discusses the way of recognizing a Roth IRA loss. When a Roth IRA owner experiences a loss, there are ways of recognizing a Roth IRA loss.

Is it possible to recognize a loss on liquidating a Roth IRA?

Yes.

It is possible to recognize a loss on a Roth IRA, according to IRS tax Publication 590, Individual Retirement Arrangements.

A Roth IRA loss occurs if you liquidate and receive back less than the cost basis.

What are the steps you would have to follow to claim the Roth IRA loss?

First, you must liquidate all Roth IRAs owned (i.e., take distribution of all assets), not just the Roth IRA account in which the Roth IRA loss occurred, by December 31 of a year in order to claim the loss for that year. 

Second, the total Roth IRA distributions from the Roth IRAs must be less than the your basis (basis is the total amount of contributions and conversions in all of the client's Roth IRAs) adjusted for prior withdrawals of Roth IRA contributions and Roth IRA conversions. 

Third, you claim the loss on Schedule A, Form 1040 as a miscellaneous itemized deduction, subject to the 2% of adjusted gross income threshold that applies to certain miscellaneous itemized deductions. If you do not itemize deductions for the year, no tax benefit is available.

Is it possible to take the Roth IRA loss if I don't itemize deductions?

No.

The Roth IRA loss deduction is available only if you itemizes deductions. If you do not itemize there will be no tax benefit from the loss.

Is this an ordinary Roth IRA deduction or a capital loss?

The Roth IRA loss is an ordinary deduction and not a capital loss.

The Roth IRA loss is a miscellaneous itemized deduction rather than a capital loss. Therefore, the $3,000 capital loss limitation doesn't apply.