Can you take the loss on a Roth Recharacterization?
Person made Roth IRA contribution – later cannot do because over the AGI limit. Recharacterizing the contribution, but has a loss on the investment. Can the loss be taken on their return? If so, where, how reported?
Permalink Submitted by Alan Spross on Wed, 2008-03-19 22:22
The loss cannot be deducted on the return unless all the Roth IRAs of the person are also closed by the end of the tax year, and amount received is less than amounts contributed by regular or conversion contributions, adjusted for any other interim distributions. And that deduction would be a misc itemized deduction subject to 2% of AGI floor. If only the particular contribution is recharacterized, there is no loss, and if this was the only contribution ever to a Roth, the loss stilll cannot be taken since the balance was not returned to taxpayer, but recharacterized to a TIRA.
If the contribution is recharacterized to that of a traditional IRA, Form 8606 should be filed to report added basis presuming that most taxpayers whose MAGI is too high for a Roth are probably also plan participants who cannot deduct that TIRA contribution. The amount that will actually migrate to the TIRA will be net of the earnings loss.
Now, in the unlikely event that the person can DEDUCT the TIRA contribution, he could deduct the original contribution, so in a sense this could actually be construed as a deduction covering the lost amount.