Liquidation of Underwater After-Tax IRA
I have a traditional IRA in which all of the contributions are after-tax. At this point, the value of the account is less than my basis and I have not taken any distributions before. Assume for the moment that the basis is $25,000 and the value is $20,000. If I liquidate the entire account, my understanding is that there will be no income attributed to this distribution since the entire amount is less than my basis. But is there any way that I can also claim a $5,000 loss on the difference between what I contributed and what I finally got out.?? If I had placed these after-tax funds in a regular brokerage account instead of an IRA, I would be entitled to a $5,000 capital loss…
Permalink Submitted by Alan Spross on Thu, 2010-12-16 23:41
Yes, there is some relief, but you must close ALL your IRAs of similar type (eg all your TIRA or all your Roth IRA accounts). If you have other TIRA accounts, they must all be included as your basis is not effectively limited to the IRA account that you made these contributions to.
So if this is your ONLY TIRA account, you could close it, report the distribution on Form 8606, receive the proceeds tax free, and potentially report a misc itemized deduction for the 5k of loss. This deduction is subject to the 2% of AGI floor and of course you also must be able to itemize to use it. And if you are in AMT you would also not be able to use it. Therefore, this is different than a Sch D entry for a cap loss since all IRA losses are ordinary losses. The deduction is only available in the year you close all your TIRA accounts.
As stated earlier, if you have other TIRAs, this will not work unless you are underwater in all of them collectively.