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Are IRA or Section 529 Plan Losses Deductible?

If your IRA or Section 529 plan has decreased in value you may be wondering if you can deduct your losses. In most cases there is no deduction for losses within an IRA or Section 529 plan. However, it may be possible to deduct such losses in certain situations.

In order to deduct a loss, all funds have to be withdrawn from all IRAs of the same type. For a traditional IRA, all of the funds from all traditional IRAs must be withdrawn. This includes simplified employee pensions and IRAs that use savings incentive matches. Funds from Roth IRAs or inherited IRAs do not have to be withdrawn in order to deduct losses from traditional IRAs. Similarly, to deduct losses from Roth IRAs all funds must be withdrawn from all Roth IRAs.

It is important to note that a decline in value is not necessarily considered a loss for tax purposes. In order for a tax loss to exist there must be “basis” in the IRA. Basis exists if the money in the account has already been taxed. In most cases, there is a deduction received for traditional IRA contributions and the earnings have not yet been taxed. Therefore, most taxpayers will not have basis in their traditional IRAs.

Basis is created by making nondeductible IRA contributions or by rolling over after-tax funds from an employer plan to an IRA. A loss can be claimed only if there is basis and that basis is higher than the amount withdrawn. It is more likely to be able to claim a loss for a Roth IRA since all Roth IRA contributions increase basis.

For taxpayer’s who have converted a traditional IRA to a Roth IRA, there may be a 10% premature distribution penalty if the distribution occurs within five years of the conversion, unless an exception applies.

In cases where a tax loss does exist, the deduction is claimed as a miscellaneous itemized deduction subject to the 2% of AGI limitation. If the loss is large enough or if there are other miscellaneous itemized deductions, there may be some benefit received from deducting the loss. It depends on each taxpayer’s individual situation. The loss may be limited further for a taxpayer with an AGI in excess of $159,950 and is disallowed completely for taxpayer’s subject to alternative minimum tax.

For further information please contact Kira Wheat at 312-980-3331, Mike Calahan at 312-980-2996 or your Blackman Kallick representative.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.