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Are IRA Losses Tax Deductible? How to Deduct IRA Losses

written by: Baby Rani•edited by: Laurie Patsalides•updated: 6/8/2009

IRA losses can be claimed on your tax return, subject to certain terms and conditions. Read this article to decide if it would be a smart move to withdraw all your IRA balances in order to claim the loss on your tax return.

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    Introduction

    The one factor common to any investment we make is the hope of creating returns that are profitable to us. There are various investment options, each with their own level of risk involved and the corresponding degree of returns that can be expected. For example, a certificate of deposit or a money market fund investment is considered a low risk investment; both these investments offer guaranteed results, though the potential return is quite low, compared to investments that involve higher risk. So, it is only natural that one goes for investments that involve higher risks, as the potential for returns is greater. Keep in mind that with the potential of higher returns there is a potential of higher losses as well!

    Also, in the case of regular accounts, with no deferring of taxes, losses on investments can be made a part of the tax returns. However, if the losses you have suffered happen to be on your Individual Retirement Account (IRA) investments, there are some requirements you need to meet to be eligible for claiming losses. Let’s take a look at how exactly you can go about claiming your IRA losses on your tax return.

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    Withdrawing your balances to claim IRA losses

    In order for IRS losses to be tax deductible, you must first withdraw all your balances in totality, from all IRAs of the same type as the one you are trying to claim losses for. For example, if you incurred the losses in a Traditional IRA, then you must withdraw all balances from all your other traditional IRAs. Similarly, if you incurred losses in your Roth IRA, you need to withdraw all balances from all the other Roth IRAs that you hold.

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    What to do in the case of a Traditional IRA

    In the case of a Traditional IRA, the total balance withdrawn must be lesser than the after-tax amount (or) basis amount, to be eligible for deduction of your IRA losses. The basis of your IRA is attributed to rollovers of after tax amounts from qualified plans, non-deductible contributions, 457(b) plans and 403(b) accounts. IRS Form 8606 needs to be filed in order to arrive at the basis of the amounts that you withdraw from your IRAs. This form will also indicate to the IRS as to which part of the withdrawal amount is attributed to after-tax amounts and which part can be claimed as loss on your returns.

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    What to do in the case of a Roth IRA

    The same rules for Traditional IRAs apply for Roth IRAs as well; all your other Roth IRA balances must be withdrawn and this withdrawn amount must be less than the base amount of your Roth IRAs.

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    Claiming losses:

    The maximum losses that you can claim on your IRA investments are ruled by the miscellaneous itemized deductions on Schedule A of Form 1040, which limits them to 2 % of adjusted gross income. Consult your tax professional to help determine the right amount to include in your tax returns.